The State of Manufacturing® 2016 by Enterprise Minnesota

$15.95

the unforeseen recession of 2008-09.

—Rob Autry, pollster, State of Manufacturing®

Inside, you’ll find:

• Topline results from a survey of 400 Minnesota manufacturing executives • Detailed analysis from pollster Rob Autry, president, Meeting Street Research • Related analyses

A C o m p r e h e n s i v e S u r v e y o f M i n n e s o t a ’s M a n u f a c t u r e r s

still mindful of the scars and lessons learned in

The State of Manufacturing ® 2016

One might speculate that manufacturers are

A Comprehensive Survey of Minnesota’s Manufacturers

2016

• Full transcripts from 19 manufacturing focus groups conducted across the state • Selected cross tabulations

READY FOR

ANYTHING

Manufacturers used the lessons of 2009 to retrench their companies against outside pressures

GOLD SPONSORS

2016 A Comprehensive Survey of Minnesotaâ&#x20AC;&#x2122;s Manufacturers

The State of ManufacturingÂŽ 2016

A comprehensive survey of Minnesotaâ&#x20AC;&#x2122;s manufacturers Rob Autry, Pollster Tom Mason, Strategic Consultant Lynn Shelton, Director Scott Buchschacher, Creative Director All rights reserved. Except for brief quotations in critical articles and reviews, no part of this book may be reproduced in any manner without prior permission of the publishers. Special thanks to all of the sponsoring organizations and executives who participated in the focus groups.

Enterprise Minnesota, 310 4th Avenue South, Suite 7050 Minneapolis, Minnesota 55415

CONTENTS

Introduction ......................................................................................... 4 Pollsterâ&#x20AC;&#x2122;s Analysis.............................................................................. 9 Poll Summary.................................................................................... 17 Issue Analysis

Harnessing the Power of Content Marketing to Reach New Audiences... 35 Staying Well: Side Effects of Workplace Wellness Plans.......................... 43 Made in Minnesota................................................................................... 50 HR as a Business Partner.......................................................................... 55 Manufacturers Pay a Steep Price for Data Vulnerability........................... 62 Business Succession Planning................................................................... 71

Focus Groups

Owatonna (Owatonna Business Incubator)............................................... 79 Minneapolis Students (Dunwoody College of Technology)..................... 89 White Bear Lake (The Specialty Manufacturing Company).................. 101 Minneapolis (MPMA)..............................................................................112 Willmar (Ridgewater College)................................................................ 123 Merrifield (Clow Stamping Co.)............................................................. 133 Alexandria (Alexandria Technical & Community College).................... 147 Alexandria Students (Alexandria Technical & Community College)..... 158 Monticello (Monticello Community Center).......................................... 168 St. Anthony (Bremer Bank).................................................................... 182 St. Cloud (Gray Plant Mooty)................................................................. 195 Mankato (South Central College)........................................................... 207 Rochester (Rochester Area Chamber of Commerce).............................. 217 Pine City (Pine Technical & Community College)................................. 227 Anoka Students (Anoka Technical College)........................................... 239 Anoka (Anoka Technical College).......................................................... 251 Winona (Minnesota Marine Art Museum).............................................. 266 Owatonna (Southern Minnesota Initiative Foundation).......................... 277 Minneapolis (Twin City Die Castings Co.)............................................. 283

Selected Cross Tabulations............................................................... 295 3

INTRODUCTION

The Students Speak This year’s survey takes questions about the skills gap directly to the next generation By Bob Kill, president & CEO, Enterprise Minnesota

Welcome to the 2016 edition of the State of Manufacturing , our ®

eighth annual survey research project that charts what Minnesota’s manufacturers think about the challenges and opportunities facing their companies. As in other years, we interviewed a statistically balanced sample of 400 manufacturers all across Minnesota, supplemented by a series of focus groups. This year we added an intriguing tweak to the focus groups. Speculation about the skills gap and other workforce-related issues typically dominate the focus groups’ attention: Where is the next generation? Why aren’t more students attracted to manufacturing? And what can manufacturers to do to fix this situation? So this year, instead of merely speculating, we thought we’d take the question right to them. Three of this year’s 19 focus groups were composed exclusively of students currently enrolled in school programs that will lead them into manufacturing careers. 4

It couldn’t have gone better. With the help of three very cooperative educational institutions, we impaneled groups at Dunwoody College of Technology, Alexandria Technical and Community College, and Anoka Technical College—each representing a broad spectrum of the kinds of people who will be running the next generation of manufacturing companies. With surprising candor, the students confirmed some notions we brought in to the conversations. Educators and parents, for example, still

Bob Kill

need to be tutored about the satisfying career opportunities that can be found in modern manufacturing. “Your teachers stress for your whole life that you need to go to a four-year (school).” “We’re all told to go to college and become white collar office workers.” “There was a stigma attached…to guys who work in the metal shop.” On parents: “My mom (said) you’re just going to be a dirty welder.” What does she think now? “She’s seeing it a lot better but she’s matured also.” On their prospects: Not one of the full time students doubted that good careers awaited their graduation (most already had received job offers); 5

their only worry is about which one to choose. “I’m being trained for things I never even thought of.” On their schools: “If you’re willing to put in the work, they’ll make sure you learn.” “Teachers are willing to take the extra step…” “Everything we learn we will use every day on the job.” On what manufacturers can do: “Offer training. Offer internships… help with financial reimbursement.” The Dunwoody students embodied a broad spectrum, including women, military veterans, and college graduates. The Alexandria students were younger and eager, with a larger cohort of much-vaunted (and diminishing) farm kids. The makeup of the Anoka group differed a bit which in some ways made it more compelling. It consisted of already-working employees of local manufacturers who were attending twice-weekly afternoon training sessions on manufacturing basics. Many (not all) were looking for ways to improve and grow professionally, although probably not through traditional paths. I encourage you to read the transcripts. Each in its own way is a fascinating read. You can pick up a book at one of our rollout events or by requesting one directly from us. Information can be found at www. enterpriseminnesota.org. All told, this was an interesting and valuable exercise, one that we’ll continue in the State of Manufacturing® 2017. 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 eight 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 longtime consultant, has also been with us from the beginning. He has now conducted more than 120 State of Manufacturing focus groups over eight years. Tom, whose company produces Enterprise Minnesota magazine, also publishes the State of Manufacturing book, along with creative director Scott Buchschacher. A special thanks goes to Lynn Shelton, the director of marketing and communications at Enterprise Minnesota, who has managed the State of Manufacturing project since it was nothing more than a concept. It is impossible to overestimate the amount of effort that she and her 6

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. Finally, I want to extend our sincerest thanks to all manufacturers who make this project possible: the executives who take time out of their busy days to talk to our pollster, the many people who participate (often year after year) in our focus groups, and those of you who will attend the many rollout events in which we present and discuss the results.

Thank you to our 2016 sponsors! PLATINUM—STATEWIDE SPONSORS • Bremer Bank • Granite Equity Partners • Gray Plant Mooty • Marsh & McLennan Agency • Minnesota Department of Employment and Economic Development (DEED) • Risdall • RSM GOLD—ALLIED SPONSORS • Blandin Foundation • Great River Energy • Southern Minnesota Initiative Foundation SILVER—EXECUTIVE FOCUS GROUP SPONSORS • Alexandria Area Economic Development Commission • Alexandria Lakes Area Chamber of Commerce • Alexandria Technical & Community College • Anoka-Ramsey Community College • Anoka Technical College • Bremer Bank • Clow Stamping Company • Enterprise Minnesota Peer Councils (Monticello & Owatonna) • Gray Plant Mooty • Minnesota Precision Manufacturing Association (MPMA) • Pine Technical & Community College • Ridgewater College • Risdall • RSM • Saint Paul Port Authority

• Southern Minnesota Initiative Foundation (Mankato, Owatonna & Rochester) • W.P. & R.S. Mars Co. SILVER—STUDENT FOCUS GROUP SPONSORS • Alexandria Area Economic Development Commission • Alexandria Lakes Area Chamber of Commerce • Alexandria Technical & Community College • Anoka-Ramsey Community College • Anoka Technical College • Dunwoody College of Technology BRONZE—RECEPTION AND ROLLOUT SPONSORS • Absolute Quality Manufacturing • Central Package & Display • Crystal Distribution Inc. • Delmar Company • FAST Global Solutions • G&A Partners • GVL Poly • HEADWATERS Search • Mactech, Inc. • Minnesota Agri-Growth Council • Pequot Tool & Manufacturing, Inc. • Productivity Inc. • Rochester Community and Technical College • Tolerance Masters • Ultra Machining Company (UMC) • USDA Rural Development • Von Ruden Manufacturing, Inc. RECEPTION BEER SPONSOR • Summit Brewing Company

POLLSTER’S ANALYSIS

Ready for Anything Manufacturers used the lessons of 2009 to retrench their companies against outside pressures By Rob Autry

Minnesota’s manufacturers are feeling remarkable levels of across-

the-board confidence in the financial prospects for their companies in 2016, while simultaneously revealing growing concern about the U.S. economy. For the third consecutive year, a whopping majority of manufacturing executives—90 percent—report confidence in the financial futures of their companies in 2016, one point higher than we saw in last year’s survey and the highest level we’ve seen in the eight years we’ve conducted the State of Manufacturing survey®. We interviewed 400 executives during the last two weeks of February and first week of March. Enterprise Minnesota supplemented this

About the pollster

Rob Autry, founder of Meeting Street Research, is one of the nation’s leading pollsters and research strategists. He has conducted all eight State of Manufacturing surveys. 9

objective research by conducting 19 focus groups of manufacturers throughout Minnesota during roughly the same period. Manufacturers expressed amazing exuberance even as their confidence in the economy sits at its lowest levels since 2012. A near majority of manufacturing executives (48 percent) predicts the economy will remain flat, six percentage points higher that last year. Thirty-two percent believe weâ&#x20AC;&#x2122;re heading into a year of economic expansion, while the number of manufacturers who believe weâ&#x20AC;&#x2122;re heading into recession is at 15 percent, twice where it was two years ago. Significantly, nearly eight in ten of the respondents who believe the U.S. is recession bound think their companies are well positioned to handle it. Even among those who expect 2016 to be a flat economy, 26 percent expect their profitability to increase and 32 percent expect their gross revenues to increase. Notably, very few expect either of these key metrics to decrease. Thereâ&#x20AC;&#x2122;s a decent level of optimism even among those who think this is going to be a flat economy. But one might speculate as well that manufacturers are still mindful of the scars and lessons learned in the unforeseen recession of 2008-09. Almost 40 percent of manufacturers say their companies operate from a formal strategic growth plan, almost exactly the same as last year. The highest rate of formal strategic growth plans is among companies with more than 50 employees (69 percent). Smaller companies are getting 10

on board, however. Thirty-five percent of companies with 50 or fewer employees now operate from a plan, up five points from 2015. As we saw last year, companies that operate from a strategic plan are more confident about their financial prospects than those that don’t. They are more confident in their company’s overall financial future (95 percent from 87 percent), more likely to expect increases in gross revenues (53 percent from 38 percent) and more likely to expect increases in profitability (43 percent from 32 percent).

KEY CONCERNS

The cost of health care coverage again tops the list of concerns faced by manufacturers (51 percent), followed by government policies and regulations (41 percent), attracting and retaining qualified workers (32 percent), and economic and global uncertainty (29 percent). Potential weaknesses in the economy and lower sales jumped nine points (to 32 percent) as a top challenge that might negatively impact future growth. Topping that factor, but diminishing in concern are “unfavorable business climate” (40 percent, down from 43 percent) and “rising health care and insurance costs” (34 percent, down from 41 percent).

THE WORKFORCE

Attracting workers remains a difficulty, although slightly less so than what we saw in last year’s survey (66 percent, down from 71 percent). Twenty-nine percent say it is “not difficult” to attract qualified candidates (down 26 percent from the recession-era high of 55 percent). Metrobased companies are less concerned by a shortage of qualified workers (63 percent, down from 70 percent), while Greater Minnesota firms retain last year’s urgency (71 percent, compared to 72 percent last year). Greater Minnesota concerns about the skills gap have declined for the third consecutive year (36 percent, down from a 2014 high of 43 percent). Metro companies remain consistent at 29 percent, up from 28 percent in both 2014 and 2015. Among companies that have difficulty attracting qualified candidates, most still say “applicants do not have the needed skills or education,” (52 percent, down from 62 percent), followed by “lack of applicants or interest” (42 percent, down from 48 percent). The lack-of-applicants challenge was markedly higher among Greater Minnesota companies (52 percent, 18 points higher than metro), while “needed skills” ranked equally between metro and Greater Minnesota companies (53 percent, 52 percent).

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).

Other workforce-based concerns include:

• Manufacturers’ greatest need continues to be employees with technical training and experience (38 percent, down from 39 percent) while the need for entry-level employees has jumped five points to 30 percent. • The impact of retiring Baby Boomers is only a modest concern for manufacturers (28 percent expressing “significant” or “modest” impact, down from 29 percent), with larger firms expressing greater concern (44 percent). • Machine operators (32 percent) and assemblers (25 percent) top the demand of employee types in 2016, as in 2015. Demand for both is

higher among non-metro manufacturers than metro manufacturers (34 percent to 30 percent for machine operators and 28 percent to 23 percent for assemblers).

An overwhelming number (95 percent) of manufacturers expect the size of their workforce to stay the same (66 percent) or grow (29 percent) in the coming year, with the greatest growth potential at companies with over 50 employees (50 percent). There continued to be overall growth in hiring over 2015, with 28 percent showing growth and 61 percent staying about the same, both exactly the same numbers as last year. Executives who predict static growth attribute it to automation and efficiency (29 percent) or “not expecting additional business” (24 percent). Succession. Companies statewide feel fairly well prepared to handle the departure of managers or supervisors (73 percent) and skilled workers (75 percent), but show much greater concern about managing the departure of a CEO or owner (53 percent are well prepared). Institutional Collaboration. About one-third of companies (34%)— and 75% of companies with more than 50 employees—collaborate with local education institutions for workforce training or other programs. Wages. Sixty percent of companies statewide expect the average wages and benefits to increase over the next two years, while 36 percent expect the amount to stay about the same. 14

Employee Development. About a third of manufacturers (32 percent) say they are currently involved in employee development or leadership training, including an overwhelming majority (75 percent) of companies with more than 50 employees. Most companies expect their investment in employee development to stay the same (72 percent). Just 20 percent say their companies maintain a formal structured leadership development program for supervisors and managers, the same percentage as 2015. This again is paced by companies with more than 50 employees (50 percent). Trade. The percentage of firms shipping more than ten percent of their product abroad is down for the second consecutive year at 15 percent, down eight percent from 2014. Metro firms lead the state in shipping more aboard with one out of five firms (19 percent) saying they ship more than ten percent of their product internationally, compared to 11 percent of non-metro firms. Moreover, those firms that do ship a significant portion of their product overseas are also more likely to say they expect to see increases in revenues (ship more than ten percent: 53% increase; ship 10 percent or less or none at all: 43%). Supply Chain Relationships. Fully 32 percent of manufacturers say they have gained new business from “home sourcing,” up from 26 percent in 2015. Companies with more than 50 percent lead the way at 46 percent. And, firms that have experienced “home sourcing” also tend to be more confident about the financial future of their firms (also

more likely to expect increases in revenue, profitability, and capital expenditures in the coming year). ISO. The survey data also suggests that companies are becoming aware of the significant changes emerging from the new ISO 9001:2015 standard. Twenty-three percent of manufacturers overall were “aware” of the changes, including half of companies with more than 50 employees. Only 20 percent of executives whose companies employ 50 or fewer were aware. Similarly, 94 percent of the large companies aware of the changes said they were “prepared to meet the changes to the new standard.” Forty-two percent of smaller companies aware of the changes said they would “use outside help” to address the ISO changes.

POLL SUMMARY

2016 State of Manufacturing® Survey Field Dates: February 16—February 25, 2016 Sample Size: N=400 Manufacturing Executives * Denotes result less than 0.5%. NOTE: Due to rounding, some figures may be higher or lower by less than one-half of one percent.

Question 1 From a financial perspective, how do you feel right now about the future for your company... 12/08 1/10 1/11 1/12 3/13 3/14 3/15 2/16 79% 78% 83% 82% 82% 84% 89% 90% TOTAL CONFIDENT 21% 21% 16% 17% 17% 15% 11% 9% TOTAL NOT CONFIDENT 28% 51% 15% 5% * --

30% 35% 28% 28% 36% 40% 43% VERY CONFIDENT 49% 49% 54% 54% 49% 48% 47% SOMEWHAT CONFIDENT 16% 13% 13% 12% 13% 7% 5% NOT VERY CONFIDENT 5% 4% 4% 5% 2% 3% 4% NOT AT ALL CONFIDENT 1% 1% * * 1% 1% 1% DON’T KNOW/UNSURE -- -- * * -- -- -- REFUSED

Question 2 Thinking about the upcoming year, in 2016, do you anticipate economic expansion, a flat economy, or a recession? 12/08 8% 34% 56% 2% --

1/10 1/11 1/12 3/13 3/14 3/15 2/16 26% 40% 32% 34% 37% 42% 32% ECONOMIC EXPANSION 53% 49% 55% 46% 54% 42% 48% A FLAT ECONOMY 19% 9% 10% 15% 7% 13% 15% A RECESSION 2% 3% 2% 5% 3% 3% 5% DON’T KNOW/UNSURE -- -- 1% 1% -- -- * REFUSED

Question 3 (ASKED IF Q2 RESPONSE, N=381) How well do you feel your firm is prepared to handle [an economic expansion/a flat economy/a recession]? Would you say you are very well, somewhat well, or not well prepared to handle it? 94% TOTAL PREPARED 44% 50% 6% 1% --

VERY WELL PREPARED SOMEWHAT WELL PREPARED NOT WELL PREPARED DON’T KNOW/UNSURE REFUSED

Question 4 As you look to 2016, do you project your company’s gross revenues to increase or decrease compared to 2015, or will they probably stay the same? 12/08 1/10 1/11 1/12 3/13 3/14 3/15 2/16 23% 44% 51% 47% 41% 45% 45% 44% TOTAL INCREASE 32% 15% 6% 8% 9% 7% 7% 12% TOTAL DECREASE 11% 29% 30% 25% 25% 23% 25% 25% INCREASE BY MORE THAN 10% 12% 15% 21% 22% 16% 21% 19% 19% INCREASE BY LESS THAN 10% 10% 5% 2% 2% 4% 2% 2% 5% DECREASE BY LESS THAN 10% 22% 10% 5% 6% 6% 5% 4% 7% DECREASE BY MORE THAN 10% 44% 40% 41% 44% 48% 47% 47% 43% STAY THE SAME 1% 1% 2% 1% 1% 2% 1% 1% TOO SOON TO SAY/ DON’T KNOW * * 1% -- 1% 1% * -- REFUSED

Question 5 And, as you look to 2016, do you project your firm’s profitability to increase or decrease compared to 2015, or will it probably stay the same? 12/08 1/10 1/11 1/12 3/13 3/14 3/15 2/16 17% 36% 39% 31% 32% 35% 30% 37% TOTAL INCREASE 34% 17% 11% 13% 17% 17% 9% 12% TOTAL DECREASE 9% 21% 21% 17% 16% 18% 14% 20% INCREASE BY MORE THAN 10% 8% 15% 18% 14% 16% 17% 16% 16% INCREASE BY LESS THAN 10% 13% 8% 6% 7% 9% 10% 4% 6% DECREASE BY LESS THAN 10% 21% 10% 5% 6% 8% 7% 5% 6% DECREASE BY MORE THAN 10% 48% 45% 48% 55% 49% 47% 60% 51% STAY THE SAME 1% 1% 2% * 2% 1% * * TOO SOON TO SAY/ DON’T KNOW -- * 1% 1% 1% * * -- REFUSED Question 6 And, as you look to 2016, do you project your firm’s capital expenditures to increase or decrease compared to 2015, or will they probably stay the same? 12/08 1/10 1/11 1/12 3/13 3/14 3/15 2/16 19% 24% 32% 27% 28% 27% 27% 25% TOTAL INCREASE 37% 24% 14% 24% 20% 19% 17% 19% TOTAL DECREASE 9% 16% 20% 15% 17% 17% 14% 17% INCREASE BY MORE THAN 10% 10% 8% 13% 12% 11% 10% 13% 8% INCREASE BY LESS THAN 10% 12% 9% 6% 11% 6% 4% 6% 8% DECREASE BY LESS THAN 10% 25% 15% 8% 13% 14% 15% 11% 12% DECREASE BY MORE THAN 10% 43% 51% 53% 47% 50% 53% 55% 54% STAY THE SAME 2% 1% 1% 1% 1% 1% * 2% TOO SOON TO SAY/ DON’T KNOW * -- * * 1% 1% * * REFUSED

Questions 7-15 Now, I would like to read you a list of factors that some companies are concerned about. For each one, please rate how concerned your firm is about that particular factor using a scale from 1 to 10, where one means that your firm is NOT AT ALL CONCERNED about it and where ten means your firm is VERY CONCERNED about it. You can choose any number between one and ten depending on how strongly you feel about it. 1-4

Mean

(7) Competition from foreign sources 2/16 6% 17% 20% 3/15 8% 15% 25% 3/14 6% 16% 23% 3/13 7% 17% 26% 1/12 7% 21% 23% 1/11 11% 20% 30% 1/10 12% 27% 24% 12/08 8% 18% 27%

62% 60% 61% 56% 55% 49% 48% 54%

3.8 3.9 4.0 4.1 4.4 4.5 4.8 4.2

(8) Managing supply chain relationships 2/16 2% 10% 29% 3/15 4% 9% 35% 3/14 3% 11% 39% 3/13 3% 10% 38% 1/12 4% 15% 39%

60% 56% 49% 51% 45%

3.8 4.0 4.4 4.1 4.6

(9) Government policies and regulations 2/16 24% 41% 33% 3/15 28% 46% 30% 3/14 30% 55% 29% 3/13 32% 58% 24% 1/12 33% 56% 29% 1/11 31% 61% 26% 1/10 38% 57% 25%

25% 23% 17% 18% 15% 12% 16%

6.3 6.7 7.1 7.2 7.3 7.6 7.3

(10) The costs of health care coverage 2/16 30% 51% 26% 3/15 34% 56% 24% 3/14 36% 59% 20% 3/13 44% 67% 17% 1/12 36% 68% 17% 1/11 43% 71% 17% 1/10 42% 68% 17% 12/08 36% 64% 21%

22% 20% 20% 14% 13% 8% 13% 13%

6.8 7.0 7.2 7.7 7.7 8.2 7.8 7.7

8-10

5-7

(Continuedâ&#x20AC;Ś) 10

8-10

5-7

1-4

Mean

(11) Costs of employee salaries and benefits, not including health insurance 2/16 6% 19% 41% 39% 4.8 3/15 8% 18% 44% 36% 5.0 3/14 4% 18% 46% 37% 5.0 3/13 7% 19% 45% 34% 5.1 1/12 3% 13% 47% 37% 4.9 1/11 5% 15% 49% 33% 5.0 1/10 6% 16% 46% 34% 5.0 12/08 7% 18% 49% 32% 5.3 (12) Attracting and retaining qualified workers 2/16 10% 32% 33% 34% 3/15 12% 33% 36% 30% 3/14 10% 34% 35% 30% 3/13 9% 30% 32% 35% 1/12 11% 31% 32% 37% 1/11 4% 14% 37% 45% 1/10 8% 19% 27% 51% 12/08 8% 22% 31% 45%

5.5 5.7 5.8 5.4 5.5 4.6 4.4 4.8

(13) Economic and global uncertainty 2/16 11% 29% 38% 3/15 12% 29% 43% 3/14 11% 31% 46%

5.6 5.8 6.0

32% 28% 24%

(14) The shipping and logistics of getting your products to market 2/16 3% 12% 19% 68% 3.4 3/15 5% 14% 27% 58% 4.0 (15) Future leadership within firm 2/16 6% 12% 27% 3/15 4% 13% 32%

60% 54%

3.7 3.9

Summary of Concerns

Concerns The costs of health care coverage Government policies and regulations

8-10

Mean

30% 24%

51% 41%

6.8 6.3

Economic and global uncertainty

11%

29%

5.6

Attracting and retaining qualified workers

10%

32%

5.5

Future leadership within firm Costs of employee salaries and benefits, not including health insurance Competition from foreign sources The shipping and logistics of getting your products to market Managing supply chain relationships

12%

3.7

19%

4.8

17%

3.8

12%

3.4

10%

3.8

Question 16 What would you say are the one or two biggest challenges your firm is facing that might negatively impact future growth? 3/14 3/15 2/16 48% 43% 40% 31% 41% 34% 31% 23% 32% 21% 29% 26% 29% 20% 15% -- -- 2% 3% 4% 3% * 1% 1% * * *

Unfavorable business climate, such as taxes, regulations and policy uncertainties Rising health care and insurance costs Weak economy and lower sales for your products Attracting and retaining a qualified workforce Rising costs of energy and materials for your products Foreign competition OTHER DONâ&#x20AC;&#x2122;T KNOW/NOT SURE REFUSED

Question 17 Thinking ahead…what would you say are the two or three most important drivers of your firm’s future growth? 3/15 75% 40% 25% 19% 3% -- -- 6% 1% *

2/16 82% New customers 51% New products 26% Developing company managers and leaders 22% Enhancing supply chain relationships 5% Achieving ISO Certification 1% Government policies and regulations 1% Attracting and retaining a qualified workforce 6% OTHER 5% DON’T KNOW/NOT SURE * REFUSED

Question 18 On average, over the last two years, have your firm’s wages, including benefits increased, decreased, or stayed about the same? 3/14 3/15 2/16 54% 58% 58% TOTAL INCREASED 6% 5% 5% TOTAL DECREASED 15% 20% 21% INCREASED CONSIDERABLY 40% 38% 37% INCREASED A LITTLE 2% 2% 3% DECREASED A LITTLE 5% 3% 2% DECREASED CONSIDERABLY 37% 35% 36% STAYED THE SAME 3% 1% 1% DON’T KNOW -- 2% -- REFUSED Question 19 Do you expect the average wages, including benefits to increase or decrease during the next two years, or will they stay about the same? 3/14 3/15 2/16 63% 61% 60% INCREASE 3% 2% 4% DECREASE 33% 36% 36% STAY ABOUT THE SAME 1% 1% 1% DON’T KNOW -- 1% -- REFUSED

Question 20 Are you currently investing in employee development or leadership training in order to attract and retain qualified employees and managers? 32% YES 67% NO 1% NOT SURE -- REFUSED Question 21 Generally speaking, would you say that as a percentage of payroll your company will invest MORE in employee development or LESS next year compared to 2015, or will it stay about the same? 12/08 16% 13% 69% 1% *

1/10 1/11 1/12 3/13 3/14 3/15 2/16 19% 18% 17% 18% 25% 22% 22% WILL INVEST MORE 10% 8% 8% 12% 7% 6% 5% WILL INVEST LESS 67% 71% 72% 68% 67% 71% 72% STAY THE SAME 1% 2% 1% 1% 1% * * DON’T KNOW 3% 3% 1% 1% * * * REFUSED

Question 22 Does your company have a formal structured leadership development program for supervisors and managers? 3/15 2/16 20% 20% YES 80% 79% NO * 1% DON’T KNOW/UNSURE * -- REFUSED Question 23 Looking back on the last 12 months, did your company’s workforce grow, shrink or stay about the same? 1/12 3/13 3/14 3/15 2/16 27% 22% 23% 28% 28% TOTAL GREW 16% 16% 14% 11% 10% TOTAL SHRUNK 8% 18% 11% 6% 56% * 1%

6% 7% 7% 8% GREW A LOT 17% 16% 21% 20% GREW A LITTLE 9% 9% 8% 5% SHRUNK A LITTLE 7% 4% 3% 5% SHRUNK A LOT 60% 62% 61% 61% STAYED ABOUT THE SAME 1% 1% -- * DON’T KNOW/UNSURE 1% -- * -- REFUSED

Question 24 In the next 12 months, does your company expect to grow or shrink the size of its workforce, or will it stay about the same? 1/12 3/13 3/14 3/15 2/16 29% 25% 30% 28% 29% TOTAL GROW 2% 5% 2% 4% 4% TOTAL SHRINK 4% 24% 2% 1% 68% * *

3% 5% 4% 6% GROW A LOT 23% 25% 24% 23% GROW A LITTLE 4% 2% 2% 2% SHRINK A LITTLE 2% * 2% 2% SHRINK A LOT 69% 67% 68% 66% STAYED ABOUT THE SAME * 1% -- * DON’T KNOW/UNSURE -- -- * -- REFUSED

Question 25 (ASKED IF EXPECT TO STAY THE SAME SIZE, N=264) Which one of the following reasons comes closest to describing why you believe your firm’s workforce size will stay about the same in the next 12 months? 29% Your firm has become more efficient and automated, so additional workers aren’t necessary 24% You are not expecting additional business in the coming year 19% You are concerned about economic conditions and how they might impact your firm 15% Profit margins are down and you are trying to do more without hiring additional workers 4% Your firm is having trouble recruiting and attracting workers 6% OTHER 3% DON’T KNOW 1% REFUSED

Question 26 I am going to read you a few different roles within manufacturing and I would like to know how well you feel your firm is prepared to handle the departure of someone in that role. Would you say you are very well, somewhat well, or not well prepared to handle that person’s departure? TOTAL VERY SMWT NOT DON’T WELL WELL WELL KNOW REFUSED (A) The CEO or owner 53% 28%

25%

42%

(B) A manager or supervisor 73% 32% 41%

20%

43%

Question 27 How much of an impact do you anticipate retirements having on your company in the next couple of years? 3/15 2/16 29% 28% TOTAL SIGNIFICANT/MODEST IMPACT 70% 72% TOTAL MINOR/NO IMPACT 14% 16% 30% 40% 1% *

14% Significant impact 14% Modest impact 20% Only a minor impact 52% No impact at all -- DON’T KNOW -- REFUSED

Question 28 How difficult is it to attract qualified candidates for your firm’s vacancies? 12/08 1/10 1/11 1/12 3/13 3/14 3/15 2/16 55% 40% 45% 58% 60% 67% 71% 66% TOTAL DIFFICULT 43% 55% 50% 39% 36% 32% 27% 29% TOTAL NOT DIFFICULT 18% 36% 22% 21% 1% 1%

14% 17% 22% 22% 29% 27% 26% VERY DIFFICULT 26% 28% 37% 38% 38% 44% 41% SOMEWHAT DIFFICULT 24% 25% 26% 19% 19% 13% 17% NOT TOO DIFFICULT 31% 26% 13% 17% 12% 14% 12% NOT DIFFICULT AT ALL 1% 2% 1% 3% 1% 2% 4% DON’T KNOW 4% 3% 2% 1% * 1% 1% REFUSED

Question 29 For what reasons have job candidates not taken a job or followed through with an interview? (ACCEPT MULTIPLE RESPONSES) 3/15 52% 27% 23% 18% 16% 17% 6% 1%

2/16 44% Skills required mismatched 25% Compensation is not high enough 16% Limited/lack of upward job mobility 14% Long commuting time/distance 10% Work schedules not flexible enough, don’t work out 11% OTHER 16% DON’T KNOW 2% REFUSED

Question 30 (ASKED IF DIFFICULT, N=266) What would you say is the biggest challenge your firm faces in attracting qualified candidates? Among Those Who Have Difficulty: 3/15 62% 48% 34% 19% 18% 9% 8% 6% 7% 1% *

2/16 52% Applicants do not have the needed skills or education 42% Lack of applicants or interest 35% Firm too small to competitively recruit 22% Inability to offer competitive wages 17% Firm location or geography -- Climate -- Inconvenient work hours -- Dirty facilities 4% Something else 2% DON’T KNOW 1% REFUSED

Among Total Sample: 3/15 44% 34% 24% 14% 13% 6% 6% 4% 5% * *

2/16 35% Applicants do not have the needed skills or education 28% Lack of applicants or interest 23% Firm too small to competitively recruit 15% Inability to offer competitive wages 11% Firm location or geography -- Climate -- Inconvenient work hours -- Dirty facilities 3% Something else 1% DON’T KNOW * REFUSED

Question 31 When looking to hire new employees, where is your need greatest? 3/13 20% 19% 49% 6% -- 4% 1% 1% 1%

3/14 3/15 2/16 22% 25% 30% Entry-level employees 21% 23% 21% Employees with technical training 47% 39% 38% Employees with technical training and experience 6% 6% 4% Employees with four-year college degrees 1% -- -- ALL OF THE ABOVE 1% 4% 4% OTHER -- 1% * DEPENDS 1% 1% 3% DON’T KNOW 1% * * REFUSED

Question 32 What types of manufacturing jobs or positions are in most demand at your company? 3/15 29% 23% 9% 10% 4% 22% 2% 1%

2/16 32% Machine operator 25% Assembler 9% Welder 7% Engineer 4% Supervisor 17% OTHER 6% DON’T KNOW 1% REFUSED

Question 33 Will the shortage of qualified workers affect your company’s bottom line and ability to meet your growth plan in the coming year? 3/14 3/15 2/16 33% 36% 28% TOTAL YES 10% 13% 11% YES, A LOT 23% 23% 18% YES, A LITTLE 61% 62% 66% NO 4% * 4% MAYBE/TOO SOON TO TELL 1% 1% 1% DON’T KNOW * * * REFUSED

Question 34 Does your firm collaborate with local educational institutions for workforce training or other programs? 3/15 2/16 36% 34% YES 63% 66% NO 1% * DON’T KNOW/UNSURE -- -- REFUSED Question 35 How much of your product did you ship internationally in 2015? 12/08 1/10 1/11 1/12 3/13 3/14 3/15 2/16 94% 94% 92% 91% 93% 89% 89% 92% 25% OR LESS 6% 5% 8% 8% 6% 9% 9% 8% 26% OR MORE 58% 31% 5% 4% 1% * --

58% 56% 52% 56% 51% 56% 58% NONE 29% 28% 29% 29% 23% 24% 27% 10% OR LESS 7% 8% 9% 8% 14% 9% 7% BETWEEN 11% TO 25% 4% 6% 7% 4% 4% 5% 4% BETWEEN 26% TO 50% 1% 2% 2% 2% 5% 4% 4% 51% OR MORE * 1% 1% 1% 2% 2% * DON’T KNOW/NOT SURE * -- * * * 1% -- REFUSED

Question 36 In what part of the world do you see greatest increase in prospective business? 1/12 20% 10% 1% 22% -- -- 10% 6% 1% 14% 10% 2%

3/13 3/14 3/15 2/16 22% 17% 19% 18% CANADA 9% 13% 8% 10% EUROPE -- 10% 8% 9% ASIA 19% 12% 13% 7% CHINA -- 4% -- 7% UNITED STATES -- 7% 6% 5% MEXICO 13% 5% 4% 3% SOUTH AMERICA 4% 2% 3% 3% INDIA 2% 1% 10% 4% OTHER 19% 17% 21% 28% NONE OF THE ABOVE 10% 12% 9% 6% DON’T KNOW/NOT SURE 1% 1% 1% 1% REFUSED

Question 37 Have you gained new OEM business from customers wanting to have suppliers closer to their location? 3/15 2/16 26% 32% YES 71% 64% NO 3% 4% DON’T KNOW/NOT SURE * * REFUSED Question 38 (ASKED IF GAINED NEW OEM, N=129) What would you say is the main reason why your supply chain relationships changed? Among Those Who Gained: 3/15 30% 23% 25% 12% 10% --

2/16 31% Shorter lead times 30% Total costs versus only product costs 21% Closer relationships/regional suppliers 11% Better inventory management by the OEM 7% DON’T KNOW/NOT SURE -- REFUSED

Among Total Sample: 3/15 2/16 8% 10% Shorter lead times 6% 10% Total costs versus only product costs 6% 7% Closer relationships/regional suppliers 3% 4% Better inventory management by the OEM 3% 2% DON’T KNOW/NOT SURE -- -- REFUSED Question 39 On a different topic, does your firm have a formal strategic growth plan? 3/15 2/16 39% 38% YES 59% 60% NO 1% 1% DON’T KNOW/NOT SURE * * REFUSED

Question 40 Which ONE of the following best describes most of your firm’s customers and potential customer’s expectations about ISO certification? 3/15 7% 10% 27% 53% 2% *

2/16 7% 10% 29% 51% 2% *

Most require your firm to have ISO certification Most request that your firm have ISO certification, but don’t require it Most don’t care about ISO certification ISO certification is not applicable in our case DON’T KNOW/NOT SURE REFUSED

Question 41 Are you aware of the significant changes and upgrades made from the ISO 9001:2008 Standard to the ISO 9001:2015 Standard? 23% 74% 2% *

YES NO NOT SURE REFUSED

Question 42 (ASKED IF AWARE, N=91) How well do you feel your firm is prepared to meet the changes to the new Standard? Would you say you are very well, somewhat well, or not well prepared to do business under those new changes? AWARE ISO TOTAL 75% 17% TOTAL PREPARED 45% 30% 13% 12% --

10% 7% 3% 3% --

VERY WELL PREPARED SOMEWHAT WELL PREPARED NOT WELL PREPARED DON’T KNOW/UNSURE (DO NOT READ) REFUSED (DO NOT READ)

Question 43 (ASKED IF AWARE, N=91) And, does your firm have the ability to address those changes to the ISO Standard with your own resources or do you use outside help? AWARE ISO TOTAL 55% 13% USE OWN RESOURCES 36% 8% USE OUTSIDE HELP 9% 2% NOT SURE --- REFUSED

Question 44 How many people does your company employ in all its facilities in Minnesota? 12/08 86% 7% 6%

1/10 1/11 1/12 3/13 3/14 3/15 2/16 89% 83% 86% 85% 80% 79% 80% UNDER 50 7% 9% 9% 7% 11% 10% 9% 51-150 4% 8% 4% 6% 8% 6% 3% OVER 150

86% -- -- 7% -- 2% 4% 1% *

89% 83% 60% 61% 47% 55% 56% UNDER 10 -- -- 15% 13% 21% 14% 15% 11-25 -- -- 11% 11% 12% 9% 9% 26-50 7% 9% 5% 5% 8% 5% 7% 51-100 -- -- 4% 2% 3% 5% 2% 101-150 2% 2% 1% 3% 3% 2% 2% 151 TO 250 2% 6% 3% 4% 5% 4% 2% MORE THAN 250 -- -- -- * 1% 1% 6% DON’T KNOW/NOT SURE -- * 1% 1% * 5% 2% REFUSED

Question 45 What are your annual business revenues? 12/08 1/10 1/11 1/12 3/13 3/14 3/15 2/16 47% 56% 46% 50% 50% 38% 42% 47% UNDER $1 MILLION 49% 39% 48% 42% 40% 55% 44% 43% OVER $1 MILLION 31% 6% 5% $20M 7% 5%

23% 25% 22% 22% 26% 23% 24% MORE THAN $1M TO $5M 6% 7% 7% 5% 12% 6% 9% MORE THAN $5M TO $10M 5% 6% 5% 3% 7% 5% 5% MORE THAN $10M TO 6% 11% 8% 10% 10% 10% 5% MORE THAN $20M 5% 7% 8% 9% 6% 14% 9% DON’T KNOW/REFUSED

Question 46 Which one of the following best describes your company’s primary business? 12/08 1/10 1/11 1/12 3/13 3/14 3/15 2/16 37% 29% 22% 17% 26% 25% 18% 26% PRECISION MANUFACTURING 16% 14% 16% 30% 13% 13% 14% 19% PROCESS MANUFACTURING 12% 15% 13% 10% 12% 30% 14% 18% AN ORIGINAL EQUIPMENT MANUFACTURER, OEM 13% 16% 15% 13% 14% 17% 20% 17% METAL FABRICATION 4% 3% 6% 5% 1% 5% 3% 4% ELECTRONICS COMPONENTS 4% 5% 7% 6% 4% 5% 5% 4% PLASTICS 3% 2% 3% 2% -- 2% 1% 2% INFORMATION TECHNOLOGY, IT -- -- -- -- -- -- 3% -- OTHER MANUFACTURING -- 1% 3% 3% 7% 4% 17% 8% SOMETHING ELSE 1% -- * -- 1% -- * 1% DON’T KNOW * 1% * 1% 1% * 4% 1% REFUSED Question 47 How many years has your firm been in operation? 12/08 -- 3% 3% 10% 13% 71% -- *

1/10 1/11 1/12 3/13 3/14 3/15 2/16 * -- * 1% * * 1% LESS THAN 1 YEAR 5% 2% 1% 1% 2% 1% 5% 1-3 YEARS 8% 6% 5% 4% 1% 4% 6% 4-6 YEARS 13% 11% 12% 10% 6% 5% 7% 7-10 YEARS 13% 9% 11% 14% 10% 12% 11% 11-15 YEARS 60% 71% 69% 70% 81% 74% 69% 16 YEARS OR MORE -- * * -- * * -- DON’T KNOW -- -- * 1% -- 4% 1% REFUSED

Question 48 And, in what year were you born? 12/08 5% 13% 37% 28% 14% 2%

1/10 1/11 1/12 3/13 3/14 3/15 2/16 3% 3% 4% 3% 1% 3% 5% 18 - 34 15% 11% 9% 10% 7% 7% 11% 35 - 44 37% 35% 30% 30% 29% 26% 23% 45 - 54 29% 32% 35% 35% 40% 37% 36% 55 - 64 15% 17% 22% 20% 22% 19% 18% 65 AND ABOVE 2% 3% 1% 2% 1% 8% 6% REFUSED

Question 49 Gender 12/08 1/10 1/11 1/12 3/13 3/14 3/15 2/16 76% 83% 86% 84% 84% 86% 81% 80% MALE 24% 17% 14% 16% 16% 14% 19% 20% FEMALE Question C What is your job title? 12/08 38% 19% 16% 5% 7% 2% 1% -- 1% -- 2% -- -- * -- 1% -- 1% -- -- 1% 3% 1% -- -- 1% -- -- -- -- 1%

1/10 1/11 1/12 3/13 3/14 3/15 2/16 50% 43% 42% 41% 40% 40% 40% Owner 21% 24% 22% 20% 26% 22% 21% President 9% 13% 17% 12% 14% 9% 13% Manager 5% 6% 6% 4% 5% 4% 7% Chief Executive Officer 6% 5% 4% 11% 6% 9% 3% Vice President 1% 1% * 1% 1% * 2% Chief Operating Officer -- 1% 1% * -- 2% 2% Managing Officer -- -- -- -- 1% 1% 1% Director 2% * 2% 1% 1% 1% 1% Partner -- -- -- -- -- -- 1% General Manager 1% 2% 1% 2% 3% 3% 1% Chief Financial Officer -- -- -- -- -- -- 1% Sales Manager -- -- 1% 1% -- -- 1% Controller -- -- -- -- 1% * 1% Division Vice President * -- * * * 1% 1% Executive Vice President -- * * * -- -- 1% Chairman -- -- -- -- -- -- * Accountant -- -- -- -- -- * * Executive Officer -- -- -- -- -- 1% * HR Officer * * -- * -- -- * Founder * 1% -- -- * 1% * Managing Partner * -- -- -- * 1% * Division President * 2% -- -- * 1% * President of Operations -- -- -- -- -- 1% -- Director of Sales -- -- -- -- -- 1% -- Operations Director -- -- -- -- -- * -- Chief Administrator -- -- -- -- -- * -- Chief Technical Officer * -- -- * -- -- -- Chief Credit Officer -- -- -- -- -- -- -- Vice Chairman -- -- -- -- -- 2% -- Director of Engineering 3% 3% 3% 4% 2% 1% 2% OTHER

ISSUE ANALYSIS

Harnessing the Power of Content Marketing to Reach New Audiences By Ted Risdall, CEO and President, Risdall

he sales process is constantly changing, and manufacturers find themselves needing to market and sell differently than in the past. To do this, organizations are increasingly adopting content marketing as the go-to communications and marketing strategy to reach customers at all stages of the buyer’s journey. The Content Marketing Institute offers one of the most complete definitions of this strategy: “Content marketing is the practice of creating relevant and compelling content in a consistent fashion to a targeted buyer, focusing on all stages of the buying process, from brand awareness through to brand evangelism.”1 In this year’s Enterprise Minnesota survey, manufacturers identified new customers and new products as two of the most important growth drivers for their businesses. Content marketing helps you connect those customers to your business, products and services, to ultimately help them decide to do business with you. 35

This chapter will explore in detail the concept of content marketing, how to use content marketing to reach today’s customers at all stages of the buyer’s journey, and a step-by-step process to develop a content marketing strategy for your business.

The changing buyer’s journey

The buyer’s journey is the path a buyer takes to purchase a product or enlist a service. It’s a three-stage process that starts when a buyer first becomes aware of a product or service. Stage 1: Awareness This is the very first stage of a buyer’s journey, when an individual initially becomes aware of your company, product or service. Typically, this awareness starts when a buyer is looking for a solution to a problem or challenge she faces, and finds your information. Stage 2: Consideration Once a buyer is aware of your product or service, he enters the consideration stage. This is where he digs deeper for more information specific to his situation or challenge, and begins to wade through which vendor options might best solve his problem. The buyer is actively considering which option facing him is best. Stage 3: Decision This is where the buyer’s journey leads—the decision. At this stage, a buyer chooses whose products or services she prefers, and take the appropriate steps to purchase. Historically, sales representatives would help a buyer through the consideration and decision phases of the journey. A call would come in with questions around a product, then the rep would share the details requested and follow up until a decision was made. Today the buying approach is changing, as more buyers take active control of their own path to purchase. Two of the most fundamental changes to the buyer’s journey today are in the awareness and consideration stages. These changes present a great opportunity for manufacturers. More and more engineers and buyers are researching product information online. An IHS Engineering study from 2015 found that 77 percent of technical professionals use the Internet to find equipment, components, services and suppliers.2 As a company, you want to make sure your solutions show up in these searches and get on the buyer’s radar. Likewise, as the buyer enters the consideration phase, you want to make sure the content you share online answers deeper questions a buyer might have. How does this help the bottom line? Will it contribute to lean manufacturing processes? What are the specs on this part? What approvals 36

does a product carry? Can a part from one vendor be used with parts from another? By meeting the buyer with this information, you can help push your solutions to the front of the competition. This is where content marketing can help companies become top of mind with potential customers. It’s a long-term strategy that affects every point of communication a company has—its website, blog, product announcements, news releases, social media platforms, customer events, advertising—to help guide a potential buyer through a specific path. Your ultimate goal for this journey is to lead the customer to purchase your products and services, and become a loyal believer in your brand.

The buzz around content marketing

It’s hard to have a conversation about marketing without hearing about content marketing. It is quickly becoming an essential strategy for manufacturers and industrial marketers as they seek new customers and connect with existing ones. The ideas are well-established, even if the term itself is still growing. As early as 1895, John Deere was marketing content through a customer magazine that today is available in 12 languages and 40 countries. Michelin Guides, the current gold standard for restaurant ratings, started as a way to help drivers maintain their cars—and find lodging and restaurants as they traveled the country in them. And the term “soap opera” comes from radio dramas in the 1930s that were developed by Procter & Gamble.3 Content marketing has seen renewed interest in the past decade, influenced by fundamental changes in buying habits. There have been changes to how buyers research products and services, and the buying cycle itself. A few telling statistics and their implications underline this trend: • For purchases under $1,000, 83 percent of buyers review three or fewer pieces of content before making a purchase decision. For purchases over $10,000, 70 percent of buyers review four or more pieces of content before making a decision.4 What this means for manufacturers: Buyers are looking to support their purchase decisions through content. More content is critical for larger purchase decisions. • Before contacting a supplier, 58 percent of technical professionals wait until they are ready to buy or are near making a purchase decision. In other words, they are in the second or third stage of the buyer’s journey. They rely on digital resources for information.5 What this means for manufacturers: More industrial buyers are turning to online channels to learn about products and services, rather than relying

only on the sales channel to push information to them. Companies can work to connect with these audiences through online content. • Forty-two percent of buyers review four or more suppliers during initial research, but only 26 percent get quotes from four or more suppliers.6 What this means for manufacturers: Companies can create compelling content to help reach buyers earlier in their journey, when the potential vendor pool is larger. These influential trends are putting more pressure on organizations to shift how they think about reaching their customers. Rather than relying simply on push marketing, there’s a shift to pull marketing. Push marketing—or outbound marketing—includes all the ways companies push information out to their customer base. This typically includes direct mail, email marketing, product announcements and advertising. The basic idea is to share your updates with those in your base, to encourage them to act now. Pull marketing—or inbound marketing—includes all the ways you pull customers into your business. This typically includes thought leadership, white papers, blogs, digital marketing and content marketing. Pull marketing works because, typically, those you’re trying to pull in are already interested in and searching for solutions. And pull marketing is content marketing’s sweet spot.

How content marketing helps influence purchasing decisions with today’s buyers

To better explain how content marketing influences buying decisions, we can borrow an example from the consumer world. Let’s say you’re interested in buying a new television. You know the basics of what you want—60 inches—but the sheer number of products is staggering. So you start to research. The beginning of your search is pretty broad because you need to be aware of which options exist in the universe of TVs that also meet your minimum requirements. To do this, you might search Google, scan store ads or browse Amazon. Once you have a better idea of what exists, you start to narrow down your list and consider your options. As part of your research, you found out you really want an LED screen with at least three HDMI ports to connect to your cable box, Blu-Ray player and gaming console. So you spend some more time reviewing manufacturers’ websites, Consumer Reports and tech magazine teardowns, reading online reviews and even visiting a few stores to get the in-person experience. Now it’s time to buy. You became aware of products available. You

considered the options. And you’re walking out of the store with your new 60-inch, 1080p LED TV, with four HDMI ports. Three months from now, you’re singing its praises to your friends, evangelizing for both the brand and the product itself. In the television example, it’s easy to follow the path of the buyer’s journey and see how with each new piece of information, you’re one step closer to making a purchase decision. The same process applies for the buyer’s journey in manufacturing. By flipping the perspective to you, the manufacturer, we can see how content marketing helps usher your audience through the buyer’s journey. You have a new product that you know will save end-users time because its durable design can stand up to shock and vibration. The part typically used is much less dependable, and you regularly hear customers complaining about how often they have to replace the part. By upgrading to your new product, they won’t have to replace the existing part as often which will save them both frustration and downtime. It’s time to start promoting the product. There are two audiences you want to reach—existing customers and new customers. To help them know about your product and the benefits it delivers, you’ve prepared a press release to share relevant information. Now you want to share that news to help your audiences move though the buyer’s journey, from awareness to consideration to decision. It’s common practice to start promotion with those already loyal to you—your existing customers. These are the people who know and trust your company and solutions, and are interested in new products. To reach this audience, you send out the press release via email, and make sure sales reps have product brochures and details for their next customer calls and meetings. Now it’s time to share information with the harder-to-reach audience— new and potential customers. To make sure this audience can find your content, you post the press release to your website and share details on social media. You make sure the content is optimized for online search. To help connect with those who might not already know your company name, you share the release and details with targeted trade media and run a digital ad campaign. This helps raise awareness. Thinking ahead to the consideration stage of the buyer’s journey, you know those who are interested but still weighing their options will need even more information. To help them better understand how this product benefits them, you make product specs, brochures and technical white papers available online as well. To make it as easy as possible to find this information, you link to these resources from the product page and press release, and share links on social media channels. These assets, in turn, help guide your potential customer to make a 39

decision. You’ve helped them become aware of your offering and supplied detailed additional information. To encourage their purchase, you add a “Buy now” button to the product page. By putting together a content marketing strategy and carrying out the plan, you can help steer your audience through the buyer’s journey to buy your product. Developing a content marketing strategy for your manufacturing business Good content marketing practices start with sound strategy. A content marketing strategy defines the purpose and goals of content marketing efforts. It also takes into account all channels of your marketing efforts— from your website and digital marketing campaigns to public relations, social media and advertising. The following process is a proven method to help you define your company’s content marketing strategy and measure success. The 11 steps of content marketing strategy: 1. Prioritize audience goals. What is the audience trying to achieve? Which of these goals is most important? 2. Define the desired action. Map the buyer’s journey. What’s the ideal action for the buyer to make at each stage—awareness, consideration and decision? 3. Develop key content strategies. How will we meet audience needs at each stage in the buyer’s journey? 4. Plan which channels to use. How will we deliver content? What channels will we use, and how? 5. Create a content map. How will we use existing assets and fill content gaps? 6. Draft an action plan. Develop site map, wireframes, editorial calendar, copy worksheet, etc. The plan will guide how you execute the strategy. 7. Define content elements. Outline the tools, diagrams, visuals, calls to action, social media posts, etc., to be used. 8. Set key performance metrics. How will we measure audience 40

engagement? What metrics will we review to understand success? 9. Schedule content updates. Determine how frequently content is published or revised. Consider how this might vary for each channel identified in step 4. 10. Outline content acquisition. Who will develop or acquire content? When is it due? What’s the revision cycle? 11. Measure audience engagement. Publish, monitor, learn, improve, repeat. Measurement is critical to understanding which content works and which areas can be improved. This method can be applied and scaled to fit your marketing budget and capacity, and expanded over time to include more robust content marketing initiatives. For example, manufacturers just starting on a content marketing strategy may want to begin by introducing new ways to promote product information. This could be developing a white paper around a technology and its benefits, making website content updates for search engine optimization or launching a blog to highlight case studies. It’s important to develop a key performance metric for each new strategy and tactic, to measure success and set benchmarks for future efforts. Manufacturers with an extensive collection of content could expand on the example above. If you have a collection of white papers, you could start a new approach to promoting that content rather than simply sharing the full white paper. For example, data, findings and details of the paper could be repackaged and parceled out across social channels, blogs and trade outreach, and an email campaign launched to draw attention to the content. Once you decide on your content marketing strategy, it’s important to document it and inform the right people on the team—others in the marketing department, anyone creating content or key sales managers, for example. This helps ensure everyone is involved in and understands the strategic content approach.

Content marketing will continue to open sales doors for manufacturers

Content marketing is a critical strategy to usher new and target customers through the buyer’s journey and drive sales growth, especially for manufacturers. And many companies are setting these as organizational goals. The Content Marketing Institute reported lead generation and sales top goals for 2016 B2B content marketing, at 85 percent and 84 percent respectively.7 41

Rather than relying on past models of push marketing and cold calls, content marketing generates leads by pulling interested and potential customers to your business through smart and relevant content. It’s an approach uniquely suited to today’s buying process, in which more customers are researching vendor and product options online before even contacting a company. In the race to grow a business, content marketing is an invaluable tool for manufacturers to meet the challenges of today’s buying process and will continue its growth as the go-to strategy to reach audiences.

(Endnotes) 1 Content Marketing Institute, “The 7 Business Goals of Content Marketing: Inbound Marketing Isn’t Enough,” 2011, <http://contentmarketinginstitute.com/2011/11/contentmarketing-inbound-marketing/>. 2 IHS Engineering 360, “2015 Digital Media Use in the Industrial Sector,” 2015, <http://www. globalspec.com/advertising/trends-wp/2015_DigitalMediaUse>. 3 Content Marketing Institute, “What Content Marketing’s History Means for Its Future,” 2013, <http://contentmarketinginstitute.com/2013/09/content-marketing-history-andfuture/>. 4 IHS Engineering 360, “Understanding the Industrial Buy Cycle: How to Align your Marketing with your Customers’ Buying Process,” 2015, <http://www.globalspec.com/ advertising/wp/WP_BuyCycle>. 5 IHS Engineering 360, “2015 Digital Media Use in the Industrial Sector,” 2015, <http://www. globalspec.com/advertising/trends-wp/2015_DigitalMediaUse>. 6 IHS Engineering 360, “Understanding the Industrial Buy Cycle: How to Align your Marketing with your Customers’ Buying Process,” 2015, <http://www.globalspec.com/ advertising/wp/WP_BuyCycle>. 7 Content Marketing Institute, “B2B Content Marketing 2016 Benchmarks, Budgets, and Trends—North America,” 2016, <http://contentmarketinginstitute.com/wp-content/ uploads/2015/09/2016_B2B_Report_Final.pdf>.

ISSUE ANALYSIS

Staying Well: Side Effects of Workplace Wellness Plans By Meghann Kantke and Matthew Webster, Gray Plant Mooty

ven for employers with the best of intentions, workplace wellness plans carry risk. Many employers remain unaware that wellness plans are subject to a potent cocktail of federal and state laws and regulations, including antidiscrimination laws, disability accommodation requirements, and privacy protections. Though often heralded as a perfect prescription for employees and employers alike, a lack of due diligence can result in unwelcome side effects. Despite the myriad legal issues involved in implementing a workplace wellness plan, more and more employers are signing up. By some estimates, over half of US employers have adopted employee wellness initiatives to a varying degree. Because of the rapid evolution and popularity of wellness plans, both federal and state compliance obligations are in a state of flux as legislatures, regulatory agencies and courts play catch up around the country. It is clear, however, that wellness plans do carry some legal risks 43

absent appropriate due diligence by employers. The Equal Employment Opportunity Commission (“EEOC”), the federal agency tasked with enforcement of federal anti-discrimination laws, continues to target workplace wellness programs for increased scrutiny. In 2014, the EEOC filed three landmark lawsuits against small and large employers, including Minnesota-based Honeywell, claiming that the employers’ wellness programs violated federal law. In late 2015, the EEOC also announced new proposed regulations for these programs. These regulations, once final, will hopefully provide employers some useful guidance for implementing workplace wellness programs, but they are unlikely to resolve all complexities and will not absolve employers of their responsibility to carefully craft and manage their programs to ensure compliance.

Employers Must Take the HIPAA-cratic Oath

Organizations with workplace wellness programs must comply with the nondiscrimination requirements of the federal Health Insurance Portability and Accountability Act (“HIPAA”). Generally speaking, HIPAA prohibits employers from discriminating in employee health plan options and related contributions based on a “health factor.” Health factors include items such as genetics, disabilities, receipt of healthcare, and health status. If an employer’s wellness program does not offer a reward or if the reward is not based on satisfying a certain health factor, then the program likely complies with HIPAA. If, however, wellness program rewards are contingent on the analysis of a health factor, the program will only comply with HIPAA if it meets the five factors of the HIPAA safe harbor provision. Those factors are as follows: 1. The total reward must be limited so as to be an incentive rather than a penalty (generally under 20% of the total employee cost); 2. The program must be reasonably designed to promote health or prevent disease, which means that it should be based on scientific studies; 3. Participation eligibility for the reward must be offered at least once a year; 4. The reward must be available to all similarly situated individuals (while also providing a reasonable alternative standard or waiver of the standard, where applicable); and 5. The plan must disclose the entire program description (including reasonable alternative standards or waivers). Wellness program rewards must be carefully planned and executed in order to fully comply with an employer’s HIPAA obligations.

What Other Laws Apply?

The Affordable Care Act (“ACA”) regulations, effective January 1, 44

2014, expanded opportunities for employers to implement outcome-based wellness programs, which are permitted under HIPAA and the ACA as long as the programs meet the requirements outlined above. Outcome-based wellness programs reward an individual who satisfies a standard related to a health factor, such as lowering blood pressure or quitting smoking. The 2014 regulations allow employers to offer incentives to individuals that total up to 30% of the annual cost of health coverage. But, other federal laws may prohibit what the ACA and HIPAA seem to permit. Among those laws are: the federal Americans with Disabilities Act (“ADA”); the federal Genetic Information Non-Discrimination Act (“GINA”); the federal Age Discrimination in Employment Act (“ADEA”); state employment discrimination statutes; state lawful consumable product laws which typically prohibit discrimination based on an employee’s use of a lawful product, like tobacco, outside of work; and privacy laws.

Remember the ADA: When Wellness Goals and Disability Protections Collide

The ADA makes it unlawful to discriminate on the basis of qualifying “disability,” the definition of which is very broad. A “disability” is defined to include any physical or mental condition that substantially limits a major life activity. Major life activities include, among other things, major bodily functions, such as organ function. So, an employer might find that, in targeting high blood pressure, cholesterol, or Body Mass Index (“BMI”) for wellness initiatives, it is also indirectly targeting the conditions that cause them. Those underlying conditions may very well be disabilities protected from discrimination by the ADA. For example, an employee may be overweight because of diabetes, which is a disability. Another example, an employee’s high blood pressure, may be due to chronic kidney disease, which is also a disability. Or, an employee’s cholesterol may be the result of hypothyroidism, which is a disability. These employees may not have the ability to satisfy the outcome standard put in place for the wellness plan, and, therefore, could not obtain the incentive being offered to employees who do meet that standard. It is, under the ADA, unlawful discrimination to deny these employees benefits offered through a wellness program because they are disabled. What’s an employer to do then? One solution is to make appropriate reasonable disability accommodations. Employers could, for example, accommodate disabled employees by offering reasonable, appropriate means by which the same wellness plan benefit may be obtained. Alternatively, employers may consider participation-based programs that reward effort rather than outcome-based programs that reward results. Participation-based wellness programs pose less risk than outcome-based initiatives, but employers still must analyze whether they are excluding 45

disabled employees from accessing benefits offered through the program. For example, if as part of a wellness program employees receive a gift card for signing up to participate in a walk-a-thon, it would be important that employees who cannot walk can still sign up and/or receive the gift card for doing something comparable. The Choice Is Theirs: Wellness Programs Must Be Truly Voluntary In addition to prohibiting discrimination, the ADA and other nondiscrimination laws prohibit employers from making certain inquiries about employee health. Under the ADA, employers can only make disability-related inquiries and/or require employees to submit to medical examinations if the inquiries and examinations are 1) job-related; and 2) consistent with business necessity. More often than not, employers’ wellness initiatives are not going to meet these requirements. There is, however, an exception that is helpful in the wellness plan context. The ADA allows collection of medical information for “voluntary programs aimed at identifying and treating common health problems, such as high blood pressure and cholesterol.” The key here, however, is the word “voluntary.” The EEOC has interpreted the voluntariness exception to mean that: • Employers may not require employees to participate in wellness programs; and • Employers may not penalize employees for choosing not to participate in such programs. To comply with these requirements, an employer must consider both the incentives it is offering as well as the workplace culture around wellness initiatives. If the “incentive” to participate in a wellness program is merely to allow employees to continue a benefit they already have, what the employer is really doing is penalizing employees who do not participate. Moreover, if the boss visits an employee’s desk to urge her to participate in wellness screening, that employee may not feel like she really has a choice. A truly voluntary program is also important under GINA. GINA prohibits employment discrimination based on “genetic information,” which is broadly defined to include much more than DNA. Genetic information includes an individual’s genetic tests—both the fact of an individual’s participation in the test and the results—and information about the manifestation of a disease or disorder in an individual’s family member. Wellness screenings or other initiatives that seek information about an employee’s family medical history, or that separately incentivize an employee’s family member(s) for participating, may violate GINA if the employee cannot obtain whatever incentive is offered without turning over protected information. In addition, GINA regulations require that the

employer secure written authorization from the employee to obtain the information, and that the written authorization form is easy to understand, describes the type of genetic information that will be obtained and how it will be used, and describes restrictions on disclosure of genetic information. In October 2015, the EEOC issued proposed regulations for wellness programs under GINA. The proposed regulations make clear that wellness programs which are part of a group health plan and which collect information about current or past health status cannot offer total incentives exceeding thirty percent of the total cost of the plan for the employee and all enrollees. This thirty-percent limitation applies to all incentives, whether financial or in-kind incentives such as awards or prizes. These proposed rules mark a shift from the EEOC’s previous interpretation of GINA, which brings it more into conformity with similar interpretations under the ADA, HIPAA, and ACA. The EEOC accepted comments through December 29, 2015, and the proposed rules are expected to be published in 2016.

Managing Wellness Information: Keep It Safe

The ADA, GINA, HIPAA and other laws restrict when and what health information employers may obtain, and they also bear on how any health information that is legally gathered is handled. The ADA requires that medical information about employees be kept confidential and that it is stored securely and separately from other personnel information. Also, employers must be mindful of restrictions on disclosure of that information to anyone other than the employee. There is also some risk in even possessing employees’ medical and health information. When the employer has and knows this information, there is an increased risk that an employee may allege that health information was improperly used in making employment decisions. Employers can help protect themselves by keeping all health information out of the hands of those who assess employees’ performance and/or make decisions about discipline or promotions.

Beware the Unintended Side Effects of Wellness Programs

The ADEA and Title VII of the Civil Rights Act of 1964 can also be implicated if a wellness program disparately impact individuals in legally protected classes, such as women, individuals of color, or individuals age 40 or over. To get an “all clear” under the ADEA, mandatory wellness programs must reasonably account for the prospective limitations of older workers. Like actual medical care regimens, wellness programs work best when they are not “one size fits all.” 47

Similarly, wellness programs run the risk of complications if they impose higher costs disproportionately on individuals in protected classes. For example, a wellness program which provided rewards for certain health outcomes but failed to account for biological differences between men and women—such as average higher Body Mass Index (“BMI”) numbers for women—could violate Title VII’s prohibition of sex discrimination. Likewise, a wellness program which set specific goals for blood pressure readings would likely have a disparate impact on certain racial groups and various national origin groups, which could create liability under state discrimination statutes. To ward off legal trouble, employers should ensure any wellness program is flexible enough to allow all employees to participate in rewards and be measured, if at all, in a manner that accounts for inherent differences between employees.

Big Data: The Next Frontier in Wellness (and Wellness Plan Problems)

Increasingly, it is popular for employers to adopt wellness programs that involve data mining. According to some sources, organizations ranging from the Colorado state government to Wal-Mart Stores, Inc. are hiring outside firms to gather data through wellness programs in order to identify at-risk employees and to make targeted, anonymous health recommendations. These data-mining organizations analyze items such as participants’ credit scores, purchase receipts, prescriptions and treatments, midterm voting records, and insurance claims. Using this data, these organizations are able to make predictions (e.g., an employee with a gym membership is likely healthier than an employee with a high bar tab) and to make individualized suggestions to participants (e.g., suggest a second opinion or physical therapy before opting for invasive surgery). While data mining may allow a wellness program to have a greater impact on employee health and employer insurance costs, employers should consider the potential for legal costs that might swallow other potential cost savings. ADA and GINA compliance obligations can all be potentially impacted by data mining that is done without proper care. The more data employers gather, even throughout outside organizations, the higher the potential for a privacy violation.

A CASE STUDY: Flambeau, Inc.

A recent lawsuit involving a wellness program highlights many of the legal considerations facing employers when implementing such plans. The case involved an international plastics manufacturer with a facility in Wisconsin that instituted a wellness program. The manufacturer’s health insurance was self-funded and self-insured, and participation in the health 48

insurance plan was voluntary. The employee wellness program at issue included two components— (1) a health risk assessment and (2) a biometric test. The biometric test included a blood draw, blood pressure test, and height and weight measurements. The assessment included a questionnaire about employee medical history and health habits, and the employees’ responsive information was reported to the company in the aggregate except for information regarding tobacco use. The health risk assessment information was used to estimate insurance costs, setting premiums and adjusting copays. The manufacturing employer also sponsored company-wide events and programs including weight-loss competitions and modified vending machine options. The employer initially provided a $600 credit for participation and completion of the health risk assessments and biometric tests. Later, the employer eliminated the credit and instead offered health insurance to employees who had completed the wellness program. After an employee lost his coverage because he failed to complete the wellness program, he filed a union grievance and then filed a federal lawsuit alleging that the wellness program violated the ADA. The federal judge dismissed the complaint, finding that the employer’s wellness program was lawful because it was a term of the employer’s benefit plan, was part of the underwriting risk assessment, and was not a “subterfuge” for unlawful activity. Central to the federal decision was that no evidence was offered that the employer used the gathered health information to make disability-related distinctions to employees’ benefits.

Conclusion

As healthcare costs continue to increase and both employers and employees look to decrease these costs and achieve better health outcomes, wellness programs will only continue to increase in number and complexity. Similarly, legal compliance obligations will likely continue to evolve. Employers are well-advised to periodically assess the fitness and wellbeing of their wellness programs to ensure they are both legal and effective.

ISSUE ANALYSIS

Made in Minnesota By the Minnesota Department of Employment and Economic Development (DEED)

he story of the Made in Minnesota Directory begins with a German farm equipment manufacturer named Geringhoff. Geringhoff, which began in 1880 in Ahlen, Germany, decided in 2011 to expand its operations to the US market. The company was deliberate and careful in its search for a location, wanting to make sure it selected the right spot for its first factory in North America. After considering 27 different sites, Geringhoff announced in September 2012 that St. Cloud would be the home of its first US manufacturing plant. Several factors went into the decision. The shuttered Donlin Co. millwork factory in St. Cloud’s Airport Industrial Park was big enough at 110,000 square feet to meet the company’s need for manufacturing space. Company executives also were impressed with the quality of the local workforce and the enthusiasm and support of officials in Stearns County and St. Cloud. But also crucial was having a local supply network that could provide fabricated metal, advanced plastics parts, hydraulics, electronic componentry and other materials used in the company’s manufacturing process. St. Cloud officials identified 65 manufacturing suppliers in the region, stretching north from Detroit Lakes to south in the Twin Cities. No other competing location in the country could offer that many suppliers. The deal was sealed. Geringhoff would come to St. Cloud in one of the state’s biggest corporate expansion projects since the end of the Great Recession. The project and how it came together attracted the attention of officials 50

at the Minnesota Department of Employment and Economic Development (DEED). DEED was involved with county and city leaders in the negotiations to bring the company to Minnesota, including offering state financial incentives. What intrigued DEED officials, though, was the role local suppliers played in influencing Geringhoff to locate in central Minnesota. If a strong lineup of regional suppliers could help persuade Geringhoff to open a factory here, then maybe that information would influence other companies to expand in the state as well. At the time, DEED, through its Minnesota Trade Office, was looking closer at foreign direct investment and developing a strategy to persuade more international companies to open operations in the state. A comprehensive list of in-state manufacturing suppliers could be one piece of that strategy. Moreover, officials thought Minnesota’s homegrown companies might be interested in using a directory to buy supplies from in-state businesses, rather than from out-of-state or foreign firms. Buying local helps the economy and keeps Minnesota dollars at home. That was a philosophy everyone could agree on. Those ideas formed the genesis of the Made in Minnesota Directory, a first-of-its-kind database to help companies find—and be found by—suppliers based in Minnesota. In January 2013, DEED launched the Made in Minnesota database survey to locate companies that wanted to be listed in the directory. Information on manufacturers of renewable energy/energy efficiency products also was gathered to help advance Gov. Mark Dayton’s executive order that Minnesota adopt cost-effective energy efficiency standards to reduce state energy consumption. Recruiting businesses for the database required significant time and effort. DEED originally gathered the names of 9,800 businesses from internal data. Of those, nearly 1,600 had email addresses that were used to launch a registration form with Survey Gizmo, a widely used online survey tool. Seven reminders were sent to these businesses. Cards with a link to the online registration also were mailed to businesses, and the agency’s business representatives invited manufacturers to participate in the survey. Additionally, nearly 500 economic development groups and related organizations were asked to encourage manufacturers to participate. In a final email blast in early October 2013, about 4,100 businesses were invited to participate in the new database. After 10 months of recruiting efforts, Made in Minnesota debuted during Minnesota Manufacturing Week on Oct. 22, 2013. The free database, at http://mn.gov/deed/data/data-tools/made-minnesota/, initially listed more than 500 Minnesota manufacturers that make everything from food products to textiles, fabricated metals, machinery, and computers and electronics. In announcing the new directory, DEED Commissioner Katie Clark Sieben said Made in Minnesota would be good for the state economy and 51

help promote the many high-quality products that are manufactured here. “The Made in Minnesota Directory is an efficient online database designed to help Minnesota businesses tap the local supply chain for their manufacturing needs,” she said. “The directory will highlight the many manufactured products and goods made in Minnesota and strengthen Minnesota’s economy by encouraging local supply chains.” Along with products and supplies, the directory contained the name and address of each participating company, a description of what each company made, year the business was established, number of employees, and corporate contact information. Businesses also listed the types of products they would be interested in buying from other Minnesota suppliers. Directory users could search by company name, products, descriptions and certifications. They also could narrow their search for suppliers to specific counties in Minnesota. Officials rolled out the directory with an event at VEE Corp., a Minneapolis company that makes theater costumes and set designs for shows such as “Sesame Street Live.” Even the Sesame Street character Elmo was on hand that day when Commissioner Sieben presented Made in Minnesota and explained how it works. VEE was chosen for the rollout because the business is involved in diverse manufacturing processes including electrical, textiles, plastic molding, lumber construction and metal fabrication. Those were among the types of manufacturing suppliers that Made in Minnesota hoped to attract. Karissa Toutloff , a costume designer at VEE, said the Made in Minnesota Directory was a great idea. “It will be good for the economy. Lots of people are wanting goods being made in the United States or Minnesota rather than overseas.” CEO Vince Egan, who founded the company more than 35 years ago, said he was still having fun with the business and was excited about being listed in the directory. Along with Sesame Street, the company was expanding into making theater and mascot costumes for shows, parades and mall displays. Disney, General Mills, Target, the Timberwolves and the University of Minnesota were among its customers. Even with its impressive list of customers, the company still wasn’t well known, though. The Made in Minnesota Directory would be one way to give the company more visibility and help spread the word about what VEE does. Following the event, more companies found out about the directory and wanted to be listed. Within a month of its introduction, the number of participating businesses had grown to more than 700. They included small firms like Action Manufacturing, a Marshall company that specializes in making off-road wheelchairs for people with disabilities, and larger firms like Alexandria Industries, an original equipment manufacturer that employs nearly 600 people in Alexandria. 52

Among other companies in the directory: • Battle Lake Outdoors makes high-quality backpacks, briefcases, duffel bags and tote bags in the central Minnesota community of Clarissa. The family-owned business has eight employees and has been operating for 30 years. All of its products have lifetime warranties. • Truth Hardware in Owatonna produces hardware for windows, patio doors and skylights, including hinges, operators and locking systems. The manufacturer, which has been in business since 1914, has 600 employees. • Daktronics, based in Redwood Falls, makes digital message centers, scoreboards, sound systems and digital billboards that have been installed around the world. The company was founded in 1968 by Aelred Kurtenbach and Duane Sander, professors of electrical engineering at South Dakota State University in Brookings. The business has 190 employees. Cables, electronic assemblies and sheet metal are among the products the company would be interested in buying from Minnesota suppliers. • Johnson Printing and Packaging, a Fridley company that has been operating since 1921, offers commercial printing and makes folding cartons, point-of-purchase displays and carded packaging. The company purchases wind power equal to 100 percent of its energy usage. The company has 45 employees. To get a clearer picture of all the companies in the directory, DEED conducted an analysis in March 2016 of the 983 registered companies. According to the study, 459 companies in the directory (47 percent) were located in the Twin Cities area. The remaining companies were in the following regions of the state: central (16 percent), northwest (10 percent), southwest (10 percent), southeast (9 percent) and northeast (7 percent). Of the Twin Cities companies listed in the directory, 42 percent (191) were in Hennepin County. Remaining companies were in the following metro counties: Ramsey (17 percent), Anoka (15 percent), Dakota (13 percent), Washington (6 percent), Scott (3 percent) and Carver (3 percent). Eighteen percent of the businesses in the directory were owned by women, seven percent were owned by veterans and two percent were owned by members of minority groups. DEED also looked at the size of the businesses in Made in Minnesota. Most of them were small, with 41 percent having ten or fewer employees. Sixteen percent had 11 to 20 employees; 14 percent had 21 to 40 employees; and 29 percent had 41 or more employees. 53

Among the products made by companies listed in the directory, fabricated metal products were the most common, manufactured by 28 percent (271) of the businesses. Other major products manufactured by Made in Minnesota companies were miscellaneous products (26 percent, or 259 businesses), machinery (13 percent, or 131 businesses), primary metal products (11 percent, or 112 businesses), printing materials (10 percent, or 99 businesses), plastics (nine percent, or 89 businesses), wood products (nine percent, or 86 businesses), furniture (nine percent, or 84 businesses), and computers and electronics (seven percent, or 73 businesses). Gov. Daytonâ&#x20AC;&#x2122;s executive order in April 2011 was the motivation for that section. In the executive order, the governor said state government is a major consumer of energy and should be a leader in adopting cost-effective energy conservation and renewable energy practices. He said industry experts estimate energy consumption can be reduced by up to 25 percent through operational changes and best management practices. When the Minnesota History Center, for example, started tracking and improving its energy consumption in 2005, the centerâ&#x20AC;&#x2122;s energy usage dropped 26.8 percent, saving taxpayers $380,000. The executive order instructed other state agencies to make a similar effort and provided necessary technical support to local governments and school districts to make energy efficiency and renewable energy improvements in their buildings. The governor wanted the state to lead by example and show it was possible to achieve energy efficiencies that cut costs, protect the environment and improve the economy. To help move that directive forward, Made in Minnesota planners focused on attracting companies specializing in renewable energy or energy conservation. Nearly 265 manufacturers in the directory make renewable energy and energy conservation products such as wind turbine generators and components, windows and doors, building controls, solar photovoltaic components and solar thermal parts. The directory has continued to grow and today contains nearly 1,000 Minnesota suppliers of products and materials. In a global economy where companies can acquire supplies from anywhere in the world, Made in Minnesota is showcasing what is made right here at home and helping to make the state more competitive. Companies that want to be listed for free can register at http://mn.gov/ deed/data/data-tools/made-minnesota/. Hundreds of Minnesota companies are already listed. Join them now and find out how Made in Minnesota is helping to strengthen the stateâ&#x20AC;&#x2122;s supply chain network. If you would like to update your listing, contact DEED Economic Analyst Magda Olson at 651-259-7183 or magda.olson@state.mn.us. 54

ISSUE ANALYSIS

HR as a Business Partner:

How strategic human resources can reduce risk, strengthen a brand and lower costs for manufacturers By Marsh & McLennan Agency

Managing common human resource issues is too often seen as a problem,

rather than a solution, for business growth. Juggling the demands of structuring a benefits program; maintaining regulatory compliance; finding, keeping and developing the right talent; and keeping on top of day-to-day “people issues” are constant and unique challenges. But smart employers are beginning to recognize it’s time to turn that perceived challenge into an opportunity. These forward-thinking employers understand that HR isn’t just a paperpushing department that oversees benefits and compliance. Instead, when elevated and empowered to be a strategic ally with the rest of the business, HR can help deliver greater profits through lowered claims costs; better, more engaged and longer-term employees and leaders; and a stronger brand in the marketplace. They should not only be sought out to manage benefits and compliance, but also to help manage employee performance, employee wellness and safety efforts, and other innovations related to employment or overall workplace vitality. 55

Additionally, one of the top priorities for manufacturers in the area of HR should be to reduce risk. This industry, perhaps more than many others, requires an increased focus on training, safety, and wellness, all of which require human resources’ involvement. And HR plays a crucial role in employment screening—finding the best workers for the job—as well as onboarding, training and safety education. HR can also take advantage of data analysis to reduce medical claims. HR is also involved in the cultural side of a business. With the higher risks and workplace challenges that manufacturing companies face, workers must be trainable, safety-conscious, and motivated—all of which are areas that HR can directly affect. Passing on knowledge to newer workers and nurturing a positive work environment are also things manufacturers need to consider, and are prime areas for HR’s influence. By ensuring that workers are a good fit, as well as healthy and loyal, a company using a strategic HR approach is in a much better place to grow. In short, strategic HR looks at the big picture: how to hire the best talent; how to make sure workers are motivated, engaged, and loyal; and how to reduce risk and workforce costs such as workers’ compensation insurance claims. To really take advantage of the knowledge and opportunities that HR departments represent, executives should see HR as a partner in the company’s growth.

The gap between company leadership and HR

Unfortunately, recent data show that many executives lack confidence in their HR strategy. A 2014 Deloitte report found that “42 percent of business leaders believe their HR teams are underperforming or just getting by, compared to the 27 percent who rate HR as excellent or good.” In the manufacturing world, a disconnect between the C-suite and HR is especially problematic. The HR department is uniquely positioned to connect the leadership of a company to its employees. Your HR staff can take the pulse of the organization; they know what issues raise the most concern among employees. They can help company leaders determine what staffing levels are needed for current facilities, and what may be needed in times of growth. And with HR’s knowledge of the workforce, it can fine-tune the hiring process to ensure the most appropriate people are hired—workers who can both do the required jobs and who fit with and are likely to strengthen the company’s culture. A report from Pepperdine University’s Graziadio Business Review1 notes that strategic partnerships between company leaders and HR departments don’t happen by accident. It takes a commitment from both sides. “A healthy tension exists between the policy directives determined by corporate HR and the diverse needs of various business units, but the best practitioners are able to achieve a healthy balance because of their deep 56

understanding of current HR practices, corporate strategy and divisional business objectives,” the report said. “Consequently, the strategic partnership created between executive leadership and HR is not an organic outcome; it is achieved on purpose— usually as the result of some need or business driver that prompts the organization to take deliberate action to satisfy that need. For HR to be an effective strategic partner in any organization, the HR professionals must understand two things: 1) the business of the business and 2) that HR work begins with the business, not HR.”

The new HR: data analytics

A strong connection with workers has never been more important. Expectations are changing, generational differences are coming into sharper focus, and technology is both illuminating and obscuring important data that can help your company succeed. Much has been made of data analytics, and it’s possible to get lost in the numbers that such analytics can provide. HR experts say the important thing is to find meaningful measurements that address your company’s specific issues. Data can be collected in many ways: employee surveys, focus groups, medical and pharmaceutical claims, workers’ comp data, etc. The primary thing is to figure out what metrics are really key to your business. For example, if workers’ comp claims have traditionally been a burden to your bottom line, that data can and should be carefully analyzed for trends. On the other hand, if turnover is a problem, your company can turn to recruitment metrics (referral rates, interviews vs. hiring rates) or retention metrics (resignation rates by department, high/low performer retention numbers). Like any other data, properly trained HR team members can crunch these numbers and help spot where problems exist and suggest possible solutions. Making data analytics a part of an overall HR strategy is not without challenges. Smaller companies may not feel they have the manpower; bigger companies may have to reallocate resources. But both can find experienced partners to help bring the company’s HR department up to speed on the latest and most effective tools in the data analytics field. By deciding which performance indicators are the most important, your company is one step closer to having an overall strategy, not just piecemeal solutions.

Stop putting out fires: make your company fireproof by improving its brand

This brings us to another point: a strategic approach to HR helps a company stop the cycle of simply responding to crises or problems, and, 57

instead, start preventing such problems from cropping up in the first place. A key part to strategic HR is recognizing that your company has a brand with both current and potential employees. The more you can do to strengthen the brand, the more attractive your company will be to new talent, and the more loyal current workers will remain. For manufacturers, part of the brand is being known as a safe place to work, and one where employees’ safety and wellness are genuinely valued. By showing that the HR department is listening to employee input on safety issues, providing effective wellness programs, and having effective training practices in place, companies can gain the trust of their workers. And we all know that, in general, a trusting worker presents less risk and delivers more value than an untrusting one. One illustrative story on the importance of employee loyalty comes from outside the industry, from Delta Airlines.2 In the 1970s and 1980s, the air carrier found success by attracting business travelers who were willing to pay more for an above-average traveling experience. The company featured skilled, motivated employees who delivered outstanding customer service. By the 1990s, however, hard economic times led Delta to cut training dollars, lay off experienced workers, hire contingent workers, and freeze pay for most employees. This cost-reduction model soured employee relations. To make things worse, when the company’s CEO was asked about the issue, he said, “Employee morale is not what it used to be. So be it.” In response, Delta employees began wearing “So Be It” buttons, signaling a lack of engagement. This had a direct impact on customer service. In addition, the company’s loss of experienced workers who took pride in their company’s brand also hurt performance. As the initial benefits of cost-cutting wore off, Delta dropped to the bottom of the industry in on-time performance. The airline also had the highest number of baggage handling and customer complaints among carriers. The result was that Delta lost its core customer, the business traveler, because an emphasis on short-term profitability had destroyed the company’s culture of dedicated employees and good customer service. One of the big takeaways from Delta’s experience is the loss of institutional knowledge, as older, experienced workers were laid off and contingent workers were brought in. Every manufacturer should know the value of experienced workers, both in terms of productivity and reduction of risk. People who know your processes and understand your company are invaluable. They can share their knowledge with newer workers and mentor them in myriad areas, not least of which being proper work procedures that reduce faults as well as accidents—both of which can lead to insurance claims. Delta sought cost-savings by laying off older workers; 58

but even in the customer service realm, experience can pay for itself. There are other ways that losing the buy-in of employees can hurt manufacturers. Employees who aren’t on top of their game are more injury-prone. And if they don’t feel valued by the company, they may be more likely to report every strain and sprain as a workers’ compensation claim.3 Of course, productivity and issues like “presenteeism” become problems as well when a workforce does not feel supported by company leadership. Improving the company’s brand can reduce costs, make training more effective, and increase productivity.

Improving hiring and retention

At a time when companies are scrambling to find employees, some organizations have a “warm body” approach. The need for workers is so dire for these employers that the quality doesn’t matter as much as the quantity. Obviously, this is not an ideal solution. Among industry leading companies, you see a different strategy. Instead of approaching HR as a mill to grind out warm bodies, these companies are working with their HR people to find, and keep, good workers, and build the leadership of the future. One example of a company that formed a strategic partnership with HR is General Mills, which created a new model of employee. The company’s Individual Development Plan was designed to help management and HR understand the needs of employees and translate those needs into a defined career path. The program emphasizes feedback and training, and even includes having the company’s CEO participate in teaching sessions with managers. This kind of commitment improves a company’s brand among employees, while also developing strong leaders. Midsize manufacturing firms may offer fewer opportunities for advancement to top management from the floor than does General Mills, but quality leadership should certainly be valued at every level. A good strategic plan for identifying top-performing employees can mean that instead of a drawn-out talent search for managerial talent outside the company, a firm can find managers by drawing on the talent and expertise being developed within its own walls. In addition, employers can offer training opportunities and job options like special projects or “stretch” assignments that expand a worker’s experience and skills, even if they’re not climbing up the corporate ranks. HR departments can also innovate by building a pipeline of talent for future growth. Many manufacturers develop relationships with technical colleges to identify talent for possible future hiring. Some are even reaching out to high school students with career day events. One Minnesota manufacturer used social media to attract students through its Facebook 59

page. At a time when finding good talent is critical to being competitive, HR has a large role to play in finding the workers your company will depend on in the future.

How to build the partnership

For some manufacturers, creating a strategic HR approach will require an investment in HR talent. But many companies already have the pieces in place. One of the best things a CEO can do to start the process is to outline for the HR department the company’s business objectives for the next five years. “How can HR help with these goals?” should be a question that both sides consider and discuss when coming up with a strategic plan. Partnering with HR can lead to better plans for addressing some of manufacturing’s biggest challenges, such as workplace injuries. A more strategic HR approach led a metal-finishing business in Lincoln, Nebraska, to create a new strategy of dealing with such injuries.4 Lincoln Industries adopted a “total worker health” approach that addressed worker health and safety from several perspectives, including on-the-job stretching, wellness programs, plus financial and emotional support programs. Lincoln Industries’ leadership made a strong commitment to these strategies, and with employee buy-in, the company wellness programs demonstrated a return on investment of 4 to1, which includes savings in health care costs, workers’ compensation, absenteeism, and employee turnover. The company also reports it has been able to hold its health care costs flat since 2007. The field of manufacturing continues to change and evolve. Companies recognize the importance of modernization, technology, and the training that goes with it. By working more closely with HR to fine-tune hiring practices, companies can make certain that the workers hired are a good fit for the physical and mental demands of the job. In addition, companies need to ensure that the experience and knowledge of current employees will not be lost. Good hiring practices, effective training, and options such as mentoring can all be parts of an overall strategy to get the most of a company’s human capital.

Challenges for smaller companies

Smaller companies may initially assume that thinking about HR in a strategic way seems extra difficult. But when the changes are on a smaller scale, the issues often remain the same, and developing an overall workforce management strategy is worth doing at any level. Larger companies can absorb growth and change more easily, while smaller companies have to be more nimble and make decisions more quickly. That makes having a strong, forward-thinking organizational structure even more important for these companies. Including HR as part of a business strategy will help smaller companies ease growing pains. 60

Getting help to implement an HR strategy

There are a host of tools available to companies seeking to have a better strategic relationship between HR and corporate leaders. The resources are out there. Industry experts and consultants can provide talent assessment tools, advice on worker education and advancement, data analytics to help fine-tune benefit sets and reduce claims costs, and assist with safety and risk-prevention efforts. The data analytics puzzle is one that many companies have struggled with, but partnering with experienced consultants can help a company crunch the numbers, reduce claims, and measure performance. Leading insurance agents and brokers also offer a range of HR specialists who provide advice, data analytics, and other tools that can help you create a more strategic HR function. Because of their familiarity with and proximity to insurance and risk management experts, input from such consultants can help a company better assess the issues facing its workers and look at its business from a risk management perspective. These specialized consultants can create a strategic HR approach that is customized to fit your manufacturing business so that your company can better address workplace risk issues, improve health care and other benefits, and keep workers engaged and happyâ&#x20AC;&#x201D;all of which contribute directly to increased profitability.

(Endnotes) 1 https://gbr.pepperdine.edu/2010/08/hrs-strategic-partnership-with-line-management/ 2 http://www.enquirer.com/editions/2001/04/15/fin_delta_family_has.html 3 http://www.marshmma.com/blog/HealthCareRicochetHowtheACAThreatenstoBoostWorkers CompensationCosts.aspx 4 http://www.marshmma.com/Blog/TotalWorkerHealthIntroduction.aspx

ISSUE ANALYSIS

Manufacturers Pay a Steep Price for Data Vulnerability Size doesn’t matter. When it comes to information technology security, no company or industry is immune to unauthorized access to its data.

By Jeremy Zwart, assurance partner & Mike Nafziger, technology management consulting principal, RSM

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It’s the data, not the size of a target, which holds the value for the hacker, and manufacturers may be vulnerable in a number of ways. Because midsize and small organizations use more “off the shelf” software, attackers typically find these companies easier to breach. While there are no silver bullets to protect against incidents, there are steps that manufacturers can take to develop a solid foundation for cybersecurity.

When it comes to information technology security, no company or industry is immune to unauthorized access to its data. Recent high-profile data breaches have influenced US companies to update their security protocols, according to a recent RSM survey.1 62

Yet when it comes to their own companies, many manufacturers feel it unlikely that their data will be a target of any breach attempts. They believe that their companies are too small or that their data is too insignificant or even useless outside the context of their business. Hackers have no interest in their data, so the thinking goes, because it is not easily monetized in the way that Social Security numbers or credit card numbers are. The statistics of cybersecurity say otherwise; a recent report by Verizon puts manufacturing at the top of the list when it comes to industries being targeted by cyber-espionage.2 Incidents of this type made up 60 percent of the breaches reported in the study by manufacturers, with proprietary trade secrets and intellectual property, credentials and systems data among the information disclosed to unauthorized parties. Understandably, because of the cybersecurity initiatives put forth by the Securities and Exchange Commission, manufacturing companies and their boards primarily fear losing client or customer information, since these fall under legal protection and data disclosure laws. According to a study by Kaspersky Lab,3 these data types are of primary concern to companies, followed by concerns regarding intellectual property. They are much less concerned with losing personnel information or corporate bank account access. Yet in todayâ&#x20AC;&#x2122;s business and technology environment, all information has value. Bank account information and access credentials, for example, are particularly attractive to thieves, enabling them to transfer funds when a computer virus is introduced into a system used to manage the account. According to the Symantec Internet Security Threat report, almost a third of manufacturing companies experienced a cyberattack in 2014, with more than 230 of those attacks resulting in a reported data breach.

Targets and their risks

The steady rise in the value of data over the past 10 years has made hacking an increasingly popular and profitable enterprise. Itâ&#x20AC;&#x2122;s the data, not the size of a target, which holds the value for the hacker. While manufacturers usually do not have the volumes of consumer data that can be found in financial or health care companies, manufacturing was the third-most targeted industry in 2015, according to the Verizon study. Manufacturers large and small may be vulnerable to breaches by criminals in a number of ways, and there are several areas at risk: â&#x20AC;˘

Intellectual property. The FBI estimated that the cost of the intellectual property stolen from US companies in 2014 was almost $500 billion.4 Most of this is attributed to China-based groups, like Emissary Panda, which extracted, on average, 58 gigabytes from each of their victims. Alternatively, when companies participate 63

in joint ventures, intellectual property can become open to theft. Thieves do not limit themselves to an organization’s property; given the opportunity, hackers will take the intellectual property of that organization’s supplier and customers as well. The impact can be significant: Agreements can include significant indemnification clauses that can come back to damage the organization where the breach occurred. •

Bank account information. Particularly attractive to thieves are online banking accounts, enabling them to transfer funds when a computer virus is introduced into a system used to manage the account. If the proper controls are not in place, hackers will simply set themselves up in the system as a vendor and create payments to themselves—without, of course, rendering any services.

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Payroll, cost accounting and other systems. These systems may include Social Security and other human resources-related information that have a potential dollar value to the hackers.

The price of vulnerability

According to the 2015 Manufacturing & Distribution Monitor,5 63 percent of manufacturers are only somewhat or not at all confident in their current ability to monitor and safeguard sensitive customer data from unauthorized access. There are real and significant costs associated with such exposure. While public disclosures of intellectual property theft are rare, the US Department of Justice handed down a formal indictment of five members of the Chinese military for hacking several companies in the steel and solar industries. The indictment included details of how more than 700,000 pages of emails from Westinghouse were stolen to learn the company’s strategies and plans.6 Potential losses from this intrusion are hard to calculate, as any business conducted in China by Westinghouse could have been negotiated with a massive advantage of knowing the company’s intentions. According to an analysis by NetDiligence of 160 data breach insurance claims:7 64

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The average cost for crisis services (forensics, notification and legal guidance) was $499,710; The average cost for legal defense was $434,354.

Amid all of the efforts taken by companies to enhance IT and data security (and despite the media coverage of many high-profile and expensive breaches), one in 10 manufacturers say they are taking no actions to improve safeguards. With so much at stake—potential financial losses, compromised brand reputations, unauthorized access to operational capital and proprietary information, and possible regulatory violations— taking no action cannot be an option.

Different types of cyberattacks

Because midsize and small organizations use more “off the shelf” software, attackers typically find these companies easier to breach than highly customized organizations. What are the weaknesses that are allowing attackers to compromise the data of manufacturing companies and, just as important, what are some of the missteps organizations are making post-breach that increase the duration and expense of the incident? Some of the more common data breach methods occurring in manufacturing companies include: •

Client-side attacks: These breaches are the most recent examples of the ongoing IT security arms race, where defenses are put in place that force attackers to find new methods of unauthorized access. Since it has become standard practice to set up an Internetfacing firewall to prevent hackers from conducting direct external attacks on an organization, attackers seek ways to invade an organization’s systems from the inside. In these cases, the attack starts on an employee’s PC and then, through multiple methods, spreads to other systems and breaches the internal servers where the desired information is stored. 65

•

Custom malware: This method uses malicious software (i.e., malware) to alter, damage or disable systems. Standard malware can easily be mitigated with anti-virus products. However, the wide-spread availability of malware kits allows even unsophisticated attackers to create customized and elite versions of this invasive software that can evade detection for months.

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Social engineering: A fancy name for what really amounts to a traditional con game. While it is a nuanced point, this type of attack compromises the organization via the manipulation of people rather than technology, even though the attack is delivered using mediums such as email and phone calls. In a common version using web pages, the attacker constructs a website that contains malicious code, then entices visitors to the page.

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Ransomware: These are attacks that do not steal sensitive data, but rather make it unavailable. The current method of choice is to infect a target system, encrypt all the material on that system and force the user to pay a ransom in order to get the attacker to provide the decryption key. These random attacks have been so successful and are so hard to combat that the FBI has encouraged victims to pay the ransom if they want their data back.8

Specific examples of intellectual property theft rarely make their way into the media. Because the loss of IP does not require disclosure, companies that have been victimized usually do not want the public to know about the loss for fear of lawsuits or a loss of investor confidence. However, in a report published on behalf of the Commission on the Theft of American Intellectual Property, 20 documented IP theft cases went to court in 2013. These cases spanned a wide range of industries, from automotive to industrial software to pharmaceuticals.9 Perhaps the best-known example involved American Superconductor Corp (AMSC) and Sinovel, a corporation based in China. Together, they were making wind turbines—AMSC made the controller or “brain” that was used in the turbine manufactured by Sinovel. In June 2011, AMSC discovered that one of the turbines was 66

malfunctioning in the Gobi desert. Technicians could not determine the nature of the problem and a copy of the malfunctioning device was retrieved and investigated. The company found that the turbine was using a stolen and modified copy of the AMSC software put in place by Sinovel. This explained why, earlier that year, Sinovel began refusing all shipments of the controller from AMSC. By the following spring, AMSC had to disclose to shareholders the loss of its biggest customer. In a single day, AMSC stock lost 40 percent of its value. By that September, AMSC stock depreciated 85 percent.10

Types of controls

Security controls can be preventive, detective or corrective by nature; however, each discipline requires its own focus. Preventive controls Preventive controls are designed to keep incidents from occurring and serve as a deterrent against unauthorized access. Unfortunately, organizations are typically too focused on preventive controls and too trusting of their perceived effectiveness. Many preventive controls focus on securing the perimeter, but with emerging features, such as cloud adoption, remote access and mobility, the concept of the perimeter is outdated. Attacks can occur in many ways, and preventive controls must expand beyond the typical network boundary. In fact, preventive controls can be deployed throughout an environment to impede attackers as they attempt to work through the process. Company management cannot count on preventive controls alone and must implement measures to stop an attack in progress once they fail. Detective controls Detective controls help to monitor and alert an organization of any malicious or unauthorized activity. They provide support for post-incident corrective controls by allowing management to understand the method by which the attackers gained access and any data they may have accessed or stolen. To be successful, detective controls must be applied with the value of the asset or data in mind. Infiltration has typically been the primary focus of detective controls, focusing on what is outside the network, rather than what is inside. However, detective controls can be implemented at any stage in the attack life cycle to increase data security. System log data and alerts can help stop the hacker at each stage. Corrective controls Corrective controls are designed to limit the scope of an incident and 67

mitigate unauthorized activity. These measures provide support for post-incident activities and help you understand how to improve your preventive and corrective controls moving forward. Many organizations view corrective controls as technical, but they can also be physical, procedural, and legal or regulatory in nature. Organizations often focus on corrective controls during a full breach, but they should be implemented earlier to reduce the risk of harm. For example, management can identify and block attackers during the initial exploitation. Hackers can be deterred from gaining the full access they need to progress to later stages and cause more damage. Organizations can implement several initiatives to mitigate costs and risks. From an administrative perspective, companies can develop a written information security program, vendor management protocols and business continuity and disaster recovery plans. Specific preparation tasks include performing an information technology risk assessment and implementing an incident response plan, mock incident response drills and security awareness training. Incident response documentation is also valuable, and can include how an incident was discovered, what actions were performed, when the incident occurred and the ultimate results.

Steps to effective cybersecurity

There are no silver bullets to protect against incidents and there is no onesize-fits-all approach to developing and implementing security controls. The reality is that a company likely will suffer a breach, but implementing the right controls makes an organization more difficult for hackers to exploit and limits the potential damage. There are five steps that manufacturers can take to develop a solid foundation for cybersecurity. Briefly, they include: 1. Cybersecurity governance: Effective cybersecurity governance is critical. It should start with your board and reach down throughout your entire organization. Every manufacturer should have robust, detailed cybersecurity policies and procedures. 68

2. Assessing the risks: Effective risk assessment allows management to identify, define and respond to the specific cyber risks to a company. Picking the right team to lead the risk assessment effort is vital. That starts with realizing that cybersecurity is not an isolated IT activity. Cybersecurity risks involve a combination of factors including the specific business model, products and services; operating procedures; systems; and people. A risk assessment team should cover all of those areas. 3. Implementing the plan: Once the risks have been assessed, management must design and implement a plan to address them. Start with proven models and tailor these to the specific risk profile of the company. 4. Detecting and responding to attacks: Monitoring is vital. In any cyberattack, the longer it takes for the breach to be detected, the greater the cost to the organization. If attackers can be detected early enough in the breach, management can remove them before any damage is done. But that takes more than just logging activity; it takes an active monitoring effort. The company also needs to know exactly what to do in the event of a serious breach. Have a detailed incident response plan ready to enact. Have regular intradepartmental drills, so that everyone involved knows what to do and when to do it. 5. Third-party risk management: Most businesses today are realizing tremendous operational efficiencies through contractor and other third-party relationships. Manufacturers are no exception. Due diligence of third-party cybersecurity is vital. Cybersecurity policies and procedures should include clear due diligence guidelines for selecting and managing third-party relationships. When it comes to cybersecurity, every company is at risk, and those risks are constantly evolving. This approach can help companies keep up with the shifting cybersecurity threat.

About the authors Jeremy Zwart is an audit partner in the Minneapolis office of RSM. He leads the manufacturing industry team in Minnesota and is a member of RSM’s national manufacturing industry team. He can be contacted at jeremy.zwart@rsmus.com. Mike Nafziger is an IT principal in the Minneapolis office of RSM. He leads the IT consulting practice in Minnesota and has extensive experience working with Minnesota manufacturers and their information technology challenges and requirements. He can be contacted at michael.nafziger@ rsmus.com. About RSM US LLP RSM US LLP (formerly McGladrey LLP) is the leading provider of audit, tax and consulting services focused on the middle market, with more than 8,000 people in 80 offices nationwide. It is a licensed CPA firm and the US member of RSM International, a global network of independent audit, tax and consulting firms with more than 38,300 people in over 120 countries. RSM uses its deep understanding of the needs and aspirations of clients to help them succeed. For more information, visit rsmus.com, like us on Facebook, follow us on Twitter and/or connect with us on LinkedIn. (Endnotes) 1 “The Real Economy, Vol. 4” (April 2015) 2 “2015 Date Breach Investigations Report,” Verizon 3 “Global IT Security Risks 2014—Online Financial Fraud Prevention” Kaspersky Lab 4 http://www.bloomberg.com/news/articles/2011-12-13/china-based-hacking-of-760companies-reflects-undeclared-global-cyber-war 5 2015 Manufacturing & Distribution Monitor Report: Information technology and data security, RSM US LLP 6 Schmidt, M. and Sanger, D. “5 in China Army Face U.S. Charges in Cyberattacks,” (5/19/2104), The New York Times, retrieved from http://www.nytimes.com/2014/05/20/us/ us-to-charge-chinese-workers-with-cyberspying.html 7 NetDiligence® 2015 Cyber Claims Study 8 “FBI’s Advice on Ransomware? Just Pay The Ransom.” (Oct. 22, 2015) The Security Ledger 9 The IP Commission Report (May 2013) The National Bureau of Asian Research 10 Riley, M. and Vance, A. “China Corporate Espionage Boom Knocks Wind Out of U.S. Companies” (March 15, 2012) Bloomberg Business

ISSUE ANALYSIS

Business Succession Planning

Developing a Financial Transition Plan Can Help Ensure a Company’s Future By: Bremer Bank, Bremer Institutional Trust, and Bremer Wealth Management

In the life cycle of a successful, privately-owned business, nothing is

more critical—or perhaps emotional—than determining how the company will thrive in the post-founder or current ownership era. Crucial tax planning, cash flow, ownership structure and leadership issues dominate the landscape of business succession planning. While there is no precise formula for determining how these challenges should be addressed for every business, considering each of these issues and following a careful process leads to the best outcomes for owners, their families and their employees as they plan for eventual transition.

Allow enough time for planning

Experts suggest that the estate tax implications of succession planning become a factor when a company reaches a certain valuation, typically more than $3-4 million, and certainly by the time the value of the business tops $10 million. At that point, the company owner or owners should begin considering specific elements of a succession plan, including: • The buy-sell agreement; 71

Estate and income tax implications of a transfer; Possible business structures to allow that transfer, including trusts or partnerships; • Liquidity demands resulting from taxes and ownership changes; In many cases the best option for carrying a business into the future is transitioning ownership to an employee stock ownership plan or ESOP. This is a particularly attractive option for businesses in which no family member is naturally suited to or interested in taking over the company. Owners considering an ESOP should begin that transition several years before they intend to exit active involvement in the business to give time for a smooth leadership transition. • •

Determine key goals

For many family-owned businesses, the primary goal of succession planning is to keep the business in the family, preserving its financial strength so it continues to thrive long into the future. Estate taxes at both the state and federal level are a primary threat to that goal. All company owners know that cash flow is a constant pressure for businesses; being faced with a large tax bill in a time of transition creates an immense challenge for a company’s new leadership. Minnesota business owners face an additional burden since Minnesota is one of fifteen remaining states that still impose a state level estate tax. While the exemption—the amount that can be passed on tax-free upon death—will grow to $2 million in 2018, in the year 2016, assets in excess of $1.6 million for an individual (or $3.2 million for a couple) face state estate taxes. On the federal level, that exemption is now $5.45 million for an individual or $10.9 million for a married couple. The federal estate tax rate above that exemption level is 40 percent, and when combined with Minnesota’s estate tax, 49.67 percent, a potentially devastating financial burden for many family-owned companies. While minimizing estate tax liability is a primary goal of business succession planning, many families also have other objectives. While it’s important to do smart tax planning, it is also important to protect the first generation or current ownership generation of the business. After scraping and struggling to make the business what it is, they shouldn’t have to ask their children for permission to go to Arizona for the winter, or buy a new pick-up truck, for example. In addition, most parents want to preserve family unity into the future. Ownership arrangements that create animosity among siblings can be avoided with properly planned and executed agreements.

Begin initial planning sessions

With their goals in mind, business owners can sit down with professionals 72

who have business continuation planning expertise and begin discussing the big picture. Ideally, company owners will invite all the professionals who have helped their business grow over the years to participate in the conversation, and bring in specialists in the wealth transfer and estate tax area as needed. Bankers, attorneys, accountants and tax professionals know the family, the business, and the legal and tax ramifications the company and family will likely face in the future. Often, bank employees with trust and estate planning experience are ideally suited to coordinate the discussion among these professionals. They can see the broad scope of the issues at hand and not just one area of concern, such as tax implications or legal agreements. A good initial planning process will involve identifying the next generation of leadership, discussing how the transfer of ownership will take place, reviewing the buy-sell agreement and considering an ESOP in situations where a next generation family member is not an option for leading the company. One of the first steps in the process involves determining if a family member or members can, and want to, assume leadership of the company. It is important for the core group of advisors to have some familiarity with the situation for planning purposes. They might ask if that potential leader is someone the banker would feel comfortable lending money to, if he or she has strong personal finances and a stable marriage, because these factors can affect how the transfer of ownership is structured to protect the family and company in the future. Some business owners may be reluctant to address the change of leadership, but if there is a family member who has been working with the company, it is important to engage in discussion with that person early in the process; there is a real risk that a potential future leader of the company could leave if it isnâ&#x20AC;&#x2122;t clear he or she will end up owning all or part of the business someday. First generation business owners are good at a lot of things, but giving up control is often not one of them. Giving some ownership stake and beginning to develop the next generation of leadership can ensure there will be a leader to take over some day. As these issues are considered, it is critical to review the companyâ&#x20AC;&#x2122;s buy-sell agreement. Often a simple buy-sell agreement is put in place when a company is founded, but not revisited for years. All companies that have grown substantially or have reached a valuation in the millions need to review this agreement, regardless of whether they intend to begin a transition to new ownership anytime soon. A company that started with a small investment from two unrelated parties might have a 90-day cash buyout out clause in the case of death of one of the owners. If they both put $50,000 into the company at its inception, thatâ&#x20AC;&#x2122;s a reasonable agreement. If it has grown in value to $15-20 73

million, it’s unlikely either co-owner could manage the buyout and keep the company viable. For those owners considering business succession and estate issues in the near future, reviewing the buy-sell agreement is essential. Not only should owners know who will run the company if they should die unexpectedly, they should also have an idea who will take over several years in the future, under a planned and controlled transition. If, as part of this process, the current ownership begins giving shares to the next generation of owners, the buy-sell agreement needs to reflect that.

Develop Tax Strategies

Naturally, when considering estate tax planning for business owners, the first critical concern is tax liability and the steps that can be taken to reduce it. There are a number of different planning strategies that will shift assets out of taxable estates at a discount, which means minimizing how much of that $10.9 million exemption is depleted. Some strategies involve shifting assets during the owner’s lifetime so they do not end up in the taxable estate. The best assets to move are those that are likely to grow, and those that are not expected to be used for retirement income. Given those parameters, owners have several options for reducing the size of their taxable estate. Gifting. Everyone can give up to $14,000 per recipient, per year in cash or assets with no tax due, and the amount does not count toward the annual lifetime exemption from estate taxes. Example: the mother and father owners of the company could each gift $14,000 per person, per year worth of stock to each of their three children, their children’s spouses and their nine grandchildren, shifting $420,000 of value out of their estate annually. For gifts over the $14,000 annual limit, taxpayers must deduct the excess amount from the federal estate tax exemption. Maximizing the value of the estate tax exemption between two spouses. In Minnesota in 2016, everyone can protect $1.6 million from the state estate tax. Many married couples try to protect the first $1.6 million credit by shifting that value of assets to the children upon the first spouse’s death. Example: Set up a trust into which $1.6 million in growth assets will be shifted upon the death of the first spouse. Anything over that amount goes to the surviving spouse, who will pass those assets onto the children at death. It isn’t until the death of the second spouse that the estate tax will be due. Establishing a grantor retained annuity trust (GRAT). With this type of trust, the owner contributes assets, often closely held company stock, into an irrevocable trust that will pay a fixed annuity back to the owner for a term of years. The retained annuity can be set high enough so the present 74

value of the annuity equals the value of the assets contributed, meaning that the gift of the remainder interest to the heirs is zero. Low interest rates and a rapidly appreciating company stock are favorable factors that can result in significant value being transferred to the beneficiaries at the end of the term of the GRAT at little or no gift or estate tax cost. Example: The owner puts $1 million, or a total of 100,000 shares of company stock, into a five-year GRAT. The owner retains an annuity stream with a present value of nearly $1 million so there is little or no gift to the trust. To the extent that the company earnings and stock value growth in the trust exceed the required annuity payments, that value remains in the trust and passes to the heirs with no gift or estate tax. Strong growth and income might mean that the owner uses only 75,000 shares to make the annuity payments, leaving 25,000 shares to the heirs in a tax-free transfer. Creating a partnership or LLC and leveraging investment opportunities. Many business owners are naturally adept dealmakers, and they are often searching for good investments. For those who find a good investment opportunity, creating a separate entity, leveraging current low interest rates, and protecting growth of the investment from taxes can build wealth that can be passed on through the estate without using the full value of the unified gift and estate credit. Example: A business owner makes a $3 million investment that is expected to grow to $5 million in ten years. Even though the owner could pay cash, he finances the investment, putting 20 percent, or $600,000 into the investment, which is purchased through a partnership or LLC owned 98 percent by the children. The investment cash flows the debt payments, and ten years later, it’s worth $5 million with the loan entirely repaid. The partnership or LLC owned by the children, now has a $5 million debt-free asset, and the business owner has only used $600,000 of the $5.45 million unified federal estate and gift tax exemption.

Manage liquidity

In many situations an estate will face a significant estate tax bill upon the death of the current company owner simply because the business has become so valuable. This shouldn’t be a surprise—bankers, accountants and attorneys can help owners understand if, and how much their estate will face in taxes. Ensuring the estate has the liquidity to pay those taxes is the next critical step. Proper planning for tax liability means ensuring the business or family has enough liquidity to pay estate taxes when they are due. The Internal Revenue Service will allow an estate to pay interest and extend the payment of estate taxes over time if the business or family doesn’t have the 75

cash to make the full payment. Most companies prefer to avoid this option, not only because of the interest payments, but also because the estate cannot be settled until all taxes are paid. In some cases, businesses will hold fairly liquid assets in a separate entity, knowing they can be sold to cover tax liability when estate taxes are due. Example: A company owner has four undeveloped lots held in a separate entity adjacent to the business buildings. When the owner dies, those lots can be sold to cover the cost of estate taxes without threatening the cash flow of the core business. Life insurance policies are often used to provide the liquidity needed to pay estate taxes and to pay other heirs. A second-to-die policy can be purchased that will pay a death benefit when both the mother and father owners of the business have died, and is typically 40 to 60 percent less expensive than insuring each parent individually. Often, a smaller policy than expected can cover the costs of expected taxes and create enough liquidity to purchase the business from non-active heirs. Example: The parents of four children own a $12 million company and the value of their total estate is $16 million. The estate will owe 40 percent of the amount over the $11 million federal exemption, or $2 million in estate taxes, leaving a net estate value of $14 million, which amounts to $3.5 million per child. If the non-business portion of the estate has some liquid assets such as stocks, those assets could be used to pay estate taxes. Only one child is actively involved in the business, and with estate taxes paid through non-business assets, that child can buy a life insurance policy that covers both parents and is paid on the death of the second. The death benefit could cover all or a portion of the cost to buy from his siblings that portion of the business he didn’t inherit. Based on the company’s cash flow, the child could decide what amount he or she is willing to borrow at the time of the parents’ death, and determine the death benefit amount of the policy. The insurance policy must be purchased by the child, not the parents, to receive the estate tax-free treatment of the death benefit. The receipt of the death benefit is also not subject to income tax.

Shift ownership to an ESOP

For many business owners, company employees are really their second family. That’s why, if there is no heir apparent in the family tree, many consider shifting ownership to an ESOP. Converting to an ESOP provides business stability and favorable tax treatment for the company, and a share in the company and excellent wealth accumulation tool for employees. It can also create ongoing income, retirement income and substantial wealth 76

for the company owner. Companies that plan to sell to an ESOP should convert to an S Corporation during the transaction, which means the company does not pay taxes on the business earnings. Instead, the tax liability is transferred to the ESOP participants as they take their distributions, which is a great tax benefit for the company. The process of selling to an ESOP begins with a valuation of the company. Typically a trustee will represent the ESOP and determine a value range for the company. That range is based on current and projected future earnings, comparable public companies, and comparable mergers and acquisitions. The trustee will then negotiate with the company owner to determine a redemption value. The first step in the integrated ESOP transaction is generally called corporate redemption and involves the owner selling all shares of stock back to the company for that negotiated amount, say $10 million. So, in this transaction, the company layered on $10 million of debt, but the valuation of the company post redemption might have been $11 million, which means the ESOP retains $1 million in equity in the company. Next, the ESOP in this example will buy $1 million of newly issued stock and issue 100,000 shares at $10 per share, and the company is now 100 percent employee owned. The company is responsible for paying the $10 million debt owed, and at the same time, will slowly allocate the 100,000 shares to the employee owners of the ESOP trust over a extended period, often 20 to 30 years. While the core transaction is a straight-forward, two-step integrated process involving the corporate redemption and the purchase of newly issued shares by the ESOP, several other factors might be negotiated in the deal. The company in this example now has $10 million in debt, and if it is a typical ESOP transaction, the majority of the debt is probably seller financed. There might be some bank financing or cash from the company balance sheet used at the closing. Seller financing means the parties need to negotiate an interest rate. To keep the interest rate down and ease earlyyear cash flow concerns, the company might offer seller warrants, which act similar to stock options. These seller warrants could have significant future value to the seller as transaction debt is paid and the company grows in value. In addition, there are employment contract concerns because in most cases, the sellers will still provide great value as leaders of the company during the transition. An employment contract is likely to prescribe basic terms, such as base salary and the availability of other benefits such as merit increases and variable compensation, as well the notification period or retirement. With a sizeable transaction debt, cash flow will be critical to the future 77

success of the ESOP and company. In this example, the sellers are owed $10 million, and would like to be paid sooner rather than later. If the company can free cash flow $500,000 per year, not calculating interest, there would be a 20-year seller note with the goal of paying the seller debt off sooner, perhaps in 12 to 15 years. The ESOP note to company note would have a similar or longer term, say 25 years. In this example of 100,000 shares, 1/25, or 4,000 shares, would be released and allocated to employees each year. As the company grows and pays off the debt, the value of each of those shares increases. It isn’t unusual for ESOP shares to double in value in the first five to seven years because of the growing equity in the company due to debt reduction and continued earnings growth. The shares in the ESOP are distributed to employees, including the former owner, based on their share of the total compensation of all eligible employees. ESOP funds are distributed when employees are no longer actively working for the company—when they leave or retire—and they pay taxes based on their individual tax rate. Like 401(k) balances, the cash value of ESOP shares can be rolled over into an individual retirement account so taxes can be deferred until funds are ultimately distributed. When an employee redeems shares, those shares are recycled to the remaining active employees in the company, again, based on their portion of total compensation. For company owners who have been in business for 20 to 30 years, either as the founder or the second generation that took over for the founder, ESOPs are a great transition tool when the next generation of family isn’t interested in an active role in the business. They allow the owner to stay active in the company through the transition while continuing to earn income and ensuring the timely payment of the ESOP transaction debt, and they serve as a great retention incentive and wealth building tool for employees. For all business transition strategies—including transferring ownership to children through trusts or estate planning, and selling to an ESOP— discussions with close business advisors should begin early and continue on a regular basis. Bankers, financial advisors, attorneys, accountants and tax professionals can provide insight that will help owners develop strategies that provide the best foundation for the future of the company while minimizing tax liabilities and cash flow concerns.

FOCUS GROUPS

Owatonna February 15, 2016

Owatonna Business Incubator

Last year’s poll found that something like 89 percent of manufacturers were quite optimistic about the prospects for their companies for 2015. That’s a lot of optimism. How do you think that number would shape up today? • I think it will slow down just a little bit. The climate, not our business. • It seems a little high, just based on conversations with different companies and where we’re at, but then I think ... business has been pretty solid. • We have two businesses. One of them is a discretionary income type product. The other is directly related to ag, both in livestock and grain. The way the market has been, a lot of people are saying, “Let’s see what next year brings.” So looking ahead, we are cautiously optimistic. We’re planning for the same year as last year, if we can get an extra five or 10 percent that’d be great. The feedback I’m getting from ag businesses is that it’s going to be a tough go. • I would’ve been in that 89 percent a year ago. Feeling really positive; Sponsor: Enterprise Minnesota Manufacturing Peer Council

right now I’m probably like 50/50 if it’s going to be a good year for us. First, we do a lot of international. The dollar has been so strong, and that’s been hard for us. • We’re really looking at the next 12 months as being the same or probably our higher revenue products going down some. We’re looking for a good year. Let’s talk about the economy in general. The stock market has thrown a wrench into a lot of people’s planning this year, and some economists are predicting the economy might slip into negative growth this year. What’s your sense of it? • Several years ago, when the economy was really a tough deal, our customers pulled back. They quit buying equipment for two years running. Then they started buying again. They had a lot of cash. They not only bought, but they continued to buy. So the last two years have been good. But with all that’s happening right now, I think people are running scared right now. They’ve used up some of their cash. They probably still have cash on the side line waiting to do something but they’re waiting to see what the best direction for their own company is. • The economy is a function of consumer spending. I think consumers are wiser than they were a few years back. They got burned during the recession and now they are holding on to their cash. I don’t think they’re spending like they used to in the past. You look at cheap gas prices, I paid a $1.39 a gallon or something ridiculous like that. I never thought I’d see that. You’d think that would free up cash for the average consumer to go out and spend it in retail but that’s not happening in this market space. • We see that because our business is more dependent on ag and oil but our business is really dependent on the retailers. If retailers are doing well and doing a lot of promotions, we get a lot of business. I think people are surprised at how the economy has changed. I don’t think it’s the same economy that it was four or five years ago. • Consumer spending is different. People are more conservative. I think that people watching the Dow drop the last couple of months is going to make that situation even worse. People are going to hold on to their money. The 2008 recession caught a lot of people by surprise. We were a little surprised in the first round of focus groups when a lot of manufacturers were looking for opportunities in the downturn. More than one person said, “A recession is a terrible thing to waste.” 80

Because of that experience are you better prepared today for a sudden downturn? • Yeah, I can speak to that. We’re about a 34-year old company. In 2008, we had to lay off people for the first time. It was a very scary time for us. Sales were half what they should’ve been. Of course, we’d load our shelves and get ready for the ice to melt and be ready. We have to be loaded and ready. We were and it didn’t come. It was a very unnerving time. Of course we had to let people go. We had to cut expenses. Basically, we came out the other side of it a totally different company. In what ways? • We manage our cash differently. We watch our inventory a lot closer. We watch our people needs closer. We make sure that we maximize all the resources that we have available to us before looking elsewhere. People have had to become more versatile. As I look back on it and then looking forward to what might happen again, I feel better that I know what it looks like. • I know what it’s going to look like; therefore, I can react sooner than I did before. It was always later than you’d think. On the first, especially in letting go of good people. Looking back on the lessons of 2008, I think we’re going to just be better at seeing the signs earlier and to speak to some of the consumers that you touched on. • The consumers have seen it, and so I think a lot of us are holding on to our cash even in our own personal lives more so than I did before 2008. Anyone else better prepared? • I know we are. In 2008 our sales dropped and we did the share job program with the state. We were just selling equipment at that point. I thought our replacement part sales would go up, but I also thought we had to diversify, to do something more than manufacturing equipment. So we started providing for our large customers as well. Now we’re making more money fixing someone’s machines than we did if we would have sold them a new one. It’s helped stabilize us. Does anybody go so far as to plan for opportunities in economic downturn? • It’s just easier to do business in a downturn. Wages are low, expectations from employees are low. Everybody’s kind of clinging on to what they have. You don’t have to plan for growth. You don’t have to take risks and go forward. It’s a leveling device.

• In a downturn, our service department goes up. Customer contact goes up because they are trying to save time and money themselves instead of buying new equipment. It’s a wonderful opportunity to hear from our customer and build up relationships. Let’s jump to ISO. What’s your sense overall value of the new 2015 standards? • I like the idea of looking at risk as an opportunity rather than just trying to meet a standard. Thinking about what will happen if we don’t get better at something, or maybe realizing we can live with a particular risk. Let’s go over here where the risk is higher or the reward is higher. • That whole idea of recognizing risk is why I wanted to do ISO. We do have some customers that would like us to do it and hang out that flag. That may get us a little more business, but it’s not why we’re doing ISO. It’s really about finding ways to keep those business processes solid and make the risk recognizable. I want everybody within the organization to recognize the risks and to do something to fix them. I have high hopes for it. I really do. How do you view productivity? How’s the bottom line? • A few years ago when the economy tanked, we worked really hard at what we were doing and how we could do it better. That did help the profitability. It’s easier to engage the managers in tough times and help them to keep working to be better and lower their costs and improve their employees. • We’re in that process right now. We’re seasonal. We have about a 120day window to move everything. Going into last year we had the largest revenue we’ve ever had. We had the best margin we’ve ever had. We had the strongest bottom line we’ve ever had. Coming out the other side of that it was a lot of pain involved dealing with all of that. What we’re in the process of doing now is basically coming up with all kinds of different ways to identify problems that we have and then how do we address those issues. In doing so, we’re going to come out the other side a much better company, much more efficient. Even this year, if we don’t get the five to 10 percent growth we’re hoping for, we should possibly end up with the same margin or a good strong bottom line without all the pain along the way. Really as a company, that is where we are right now. • When you go through a year like that it puts a lot of stress on people and the facility. Fortunately, we’ve had a lot of people who have been with us a long time, so we’re able to get it done, but we know that’s not the way 82

to do it. Our number one goal is to build a stronger foundation through enterprise actually. • We really need to harness this ISO thing. It is really setting expectations for different work centers. What is efficiency in that work center? If we’re not efficient in a specific work center, and we have lots of inventory piling up in front of it we’re at risk of not making the delivery of that order for that customer, we’re losing the customer, and all those things can be defined in a way that I think employees hopefully will understand rather than just work harder. • In the last five years our sales are up, but we’ve taken probably seven or eight people out of the organization. We’ve gone from close to 55 closer to 45 now. And kept the same level of productivity? • Yeah. It makes it a little more challenging if you get a downturn, and you can’t play that card much more. Now you’re trying to find some other way. We’ve done a lot of cross-training and we’re trying to get our folks to be able to do a lot of different things. We kind of manage our ups and downs a little bit with some short hours and things which never is a good employee or morale booster but then we try to do a good job of communicating that. • When it’s slow, there may be a little less hours but it’s a business, but when it’s busier, you get some overtime. It does kind of weigh out in the end even though it doesn’t feel like it. They don’t remember the overtime hours, but they do remember the short hours, but we try to remind them of that. We’ve gotten pretty adaptive with the ups and downs. What about capital expenditures? Any change in your attitude about what you’ll do this year? Are you buying? • We have stopped capital expenditures this year. We’ve been spending a lot in the last few years, and things are really good but at this point, we’re looking more at preserving cash and not making any significant capital expenditures at all. • We’ve made a decision to make an investment in people and processes and not equipment which we hadn’t done in a long, long time. • We’re seeing wage pressure. We’re seeing wages go up. There’s less to go around for capital expenditures, and we’re really making do, making our old equipment more efficient with better upkeep and all those kinds of 83

things. We’re not going to be investing a lot of cap ex this year. Just can’t do it. • We’ll be about the same as the last couple of years. Let’s quickly go through some issues that continually provide challenges for manufacturers. What about supply chain relationships? Things seemed to have tightened up during the recession. Still true? • Coming out of 2008, we as a company had several relationships with vendors based on communication. Some of them didn’t weather the storm as well as others. I know we’re in a better place with some of the new people we work with. Looking ahead in the year to come we see some other areas that really need attention and we are going to work hard on that to kind of fall in with educating our people and training as well. I know we’ve changed a lot since 2010 in relationships and it was overdue. • Over the last couple of months we’ve seen some of our large customers and we’ve discovered a couple of guys who say “We’ll give you another year with no price increases.” We’ve also seen some of our big vendors coming to us asking us for me to be in meetings with them more than I have for a long time. Their upper managers from their companies are coming in with them just to kind of get a feel for what we’re thinking and knowing pricing is maybe more important than ever to us. I’ve seen it on both sides. What about the trend of auction bidding? • We refuse to go on online bidding with them. They come back and are up for contract renewals in May, and they call us ahead of time to find out what are you guys going to do, you can keep the contract without us going out to bid. Three of our major customers have asked if we’d step for one more year with the pricing, so they did not have to go up to bid. What about healthcare, the cost of employee-related health care? • We had our first year in many where we had a very small increase, very small. I’m not sure why. I think it’s the lull before the storm. Again, we were under 50 employees and that I think that made a huge difference. Still being paid it’s a huge expense, a huge expense for us. • We had a decrease, and I thought it was maybe a mistake, but I didn’t ask. • We had a 26 percent increase after Obama went from 100 back to 50 for small business, which was a $165,000 increase in our health care cost. 84

That’s with about 55 people who have health insurance. Our total health care cost this year is $650,000. That’s a lot of money. In the plan, it’s about 52 at $12,000 a month. We start with our employees, and I can’t go to you and say, “Now because we have to take $12,000 and split it between us it’s not affordable.” You swallowed the whole thing? • No, I passed on a small part of them, so they had some ownership. We changed the plans a little bit. They’re all really concerned too about their cost and the company’s cost and it’s unsustainable for us. It’s, “I’ll give you guys all some money, and you go buy your own health insurance.” Does wellness or well-being play any role in this at all? • There was a big buzz a few years ago I don’t even hear it anymore. • When it came to the scale and took anybody who was on the healthy end and anybody who was on the unhealthy end, and it brought us all the same one to 12, and it brought us all to a six which is equal. Out of 26 people, we had a $23,000 increase just from bringing our health group to a six, just to get to level playing field. We had a $23,000 increase and we consider ourselves to be a healthy group. Basically, we didn’t have anybody to really have a large claim, and it wasn’t bringing in any small claims and especially anything that was ongoing. That in itself was quite an adjustment just to be brought to the middle of the group. Where is the incentive then to stay to do the wellness? How about wage pressures in addition to the benefit costs? • We’re starting to see it. We’re really starting to see it. I have a competitor in the Rochester, New York area who is starting employees in their back room at about $11 an hour. We’re $15, and we can’t find people who are competent at less than that, and that really puts us in a disadvantage with those people. I wouldn’t want to live in Rochester, New York but we’re starting to see that number, and we can no longer get those $11, $12, $13 an hour people to come in to even talk to us. • First we always try to be proactive and pay the fairest wage we can. In fact, typically we pay more than we have to. We just want our people to do well. We’ve learned that we’re bringing in assemblers and cleaners at $13 and we’ve had to be at $13 and in your camp where we’re probably going to be closer to $14 or $15 to find people who actually show up on time, come back after lunch and stay till 4:30 and would even be interested in having some overtime if it was offered.

• We hire some IT related people with programming or data processing skills, and they are ridiculously expensive. I can’t pay my managers what I need to pay a starting IT person or other person. The people in management are paid less. Which brings us to the skills gap issue. Still an issue? • We don’t run any of this really high tech equipment. If we can find someone, that’s our culture we’re willing to train them and do what we need to do. We look at culture first not the skills set that they have. They have to be somewhat mechanical or willing to do this kind of work, but we’ll train them. • The hardest position is pressman because nobody knows how to do it anymore. That’s an extremely difficult position to fill. As long as it is mechanical you can train them. What about retirements? A challenge? • Challenges—there are people who should be retiring and they just won’t. • There are just some people who are not as productive, and they stay for health insurance and they’re not producing like they used to. • It’s going to be a problem. We have three people who are past retirement age, and as long as they keep coming to work it’ll be fine, but there will be a day, and we won’t have any warning, and something will happen. We have a husband and wife who work for us. When something happens to one of them, they’re probably both going to be gone the next day. It’s going to be hard to fill those positions because they’ve been with us with 45 and 35 years so it’s going to be really an issue and you can’t just find that type of person. (Name) said “We first interview for character. Don’t talk too much about the job except what they want to hear and then we interview for those skills.” They have to fit the character, the company, which has made a big difference in people working. How many of you have a formal plan for anticipating training leaders? • It’s our biggest challenge, just to train leaders. • We’ve just started the training initiative. The company has outgrown our processes. We need to get out of our own way now, and we’ve hit the ceiling, and it has to do with our leadership, and it has to do with processes that aren’t in place. For us, that’s our main focus now, to build the leadership team that’s for the future of our company. I see it as the greatest 86

challenge that we have—the processes and then the communication levels to manage those processes and understand the information. From a leadership side, we made it become the most important thing in the last year. • The size of the company that I had when I came in we had supervisors, no managers. To bring in the right people, it’s been a real painful experience over the many years to try to bring the right people in. We’re not coming from a culture that’s larger than ours and stepping down to a smaller company we really have been working hard trying to develop. It’s really hard to find a good person to come to a smaller company. • You’re really trying to find somebody who has the skill with the right character and it’s really tough to find those people. If it was a bigger company, we’d probably already be there. They’re not going to come from a bigger company down to a smaller company. Developing those people is something that we worked on for years and years and years, and you’re always bumping up against the ceiling. Let’s talk about growth a little bit. Everyone expects to grow a little at least this year, yes? Will it come from existing customers or new markets and new customers? • Our industry as a whole is doing quite well. We would like to think that we have a lot of really good people in place to handle that. We have several dealers that we’ve added in the last five years, one of which has become our top sales producer. We’re looking for a five to 10 percent increase and it’s based on not moving into other market areas or areas where we’re not known. It’s just basically continuing to show our dealers best practices with our products, and it’s getting our growth from them. • We have one work center that’s relatively new. It’s just a first turned small quantity high service portion of our business that grew about 120 percent last June. We’re pegging that at 30 percent this year, overall growth at 10 percent. Some of our market areas aren’t projected to grow at all they’re just meant to be maintained. We’re really just kind of shifting the rudder a little bit to a different direction as an organization and going for that higher growth, higher service following that market. How’s the business climate in Minnesota? How is it as a place to do business? • It’s cold here. • I find it difficult. As part of the business, we’re building a day care 87

center. I’m used to doing business. My God, the hoops we have to jump through to provide space for kids to come in and learn it’s just unbelievable. I’ve been ready to just walk away a few times. We have to spend $1,500 to get started on plumbing plans, $1,000 for the state fee now that’s $500 to draw it to the state spec for that. The guy didn’t have to think. It was just there. It’s just unbelievably complicated. We’re having inspectors coming in and then calling the state and making sure that everything we’re doing is right, otherwise they won’t license you. Is it more demanding than the regulations in your business? • Definitely. We just did an addition a year ago, and that was difficult enough trying to make sure we had everything done right for them with instructions and that business is just unbelievably complicated. If anyone wants to do business, you can grow your business, but you’re going to have to pay fees to do it. • I hear a lot in this group about things like tax credits for R&D and things that make me wonder if it is worth it. All I can do is compare our business to others that are around the state, and I think others have the advantage over us business climate wise. • From R&D, yes, but we wanted to set aside a certain portion of our building just for R&D, and we have these ideas that we want to do. One of the main reasons we haven’t done it though is that we don’t have the right processes in place yet to support those initiatives. In thinking of R&D and R&D tax credit in that and working with my CFO and other tax people, we are really afraid to apply for the R&D tax credit because of the exposure. For what it is, and for what I’ve heard in this group and what several people here have gone through, I’m just not really interested in pursuing it, which is kind of sad really because if there was an R&D tax credit, I would be more apt to try new things. • You’re being tested on the principles that assess your expenses that you’re applying to R&D. • They question everything you do so you’re defending yourself. • It’s supposed to be something that’s incenting you to go out there and develop new processes and products in business real estate, but instead what it’s doing is holding guys like us back from doing that. • The Feds are as not bad. The state of Minnesota is just terrible.

FOCUS GROUPS

Minneapolis (Students) February 23, 2016

Dunwoody College of Technology

Now that you’ve been in school for a while and you see what’s going on, what surprises you? Is there something that surprises you about manufacturing, something you didn’t know when you came in? • For me it’s been the fact that it doesn’t take a certain kind of brain to get good at this kind of work. You just have to believe in the process and get a little encouragement along the way. A lot of guys—and there is only one other female in my group—have done automotive, they’ve worked in machine shops, they’ve welded. Stuff I’ve never even come close to, although I did a little sculpting in college. I’ve learned that you just have to be rigorous, nobody’s going to hold a gun to your head. If you have some focus, you can get through this program and be an equal. Let’s drill into that a little bit. Where did you go to college before here? • I was at (name) University. I did everything from theology to sculpture, to music, to everything humanities, plus math. They’re known for engineering. They also have a really great medical and dental school. It’s not that I couldn’t use my psych degree, it’s just that I can’t support the lifestyle I needed with that psych degree. I’d have to go back for a doctorate and that’s not where I wanted to be. I want to use my hands. It’s Sponsor: Dunwoody College of Technology

kind of an athletic pursuit, this automation and robotics. You’re out there, you’re in the field, you’re traveling all the time and it can get as hardcore as you want it to. • I initially came in for the electronics program but every time I passed by the machine shop I thought, “I want to get in there and get my hands dirty as well.” Growing up with two brothers who were very mechanical, I was the artsy one in the family. Then I got into these programs, learning more and more about how they can apply, especially automated systems, with robotics and things. You just start learning more and more about how that’s present in everything that happens out there. There’s that wonderful thing about it: you could easily get a job or a career and it doesn’t have to be a certain type. You could work in a warehouse environment. You could work in a shipping environment. You could work in a lab environment. Or you could work in a creative, artistic environment as well. • I find myself starting to learn some of the things I watched my brothers do growing up and I never had any interest in at the time. About a month ago, I called my older brother and we had a good laugh. He’s like, “Yeah, well, you should have paid more attention when you were younger. You’d be farther ahead by now.” I don’t know, our teachers are good. I think the biggest surprise was just finding out the scope of what this training can lead to—things you don’t notice if you’re not on the inside of it. Now, I walk through everywhere with different eyes. I can see, “Well, that’s automation right over there. Oh, that’s electronics engineering.” This applies to everything, it’s all around us at all times. • When I was in the military overseas, I got out of touch with everything that was going on back in the States. But when I got out, I knew I wanted to be a machinist. I didn’t really know that there was such a high demand for machine tool technology students. That was a big surprise. • I was surprised at how hands-on the program is. Usually, design and engineering is “type a few things on your computer and send it on to the next guy.” We actually make things. That was a big plus for me. • I remember our metals lab at school. It wasn’t lacking or anything, but the kids who were taking it chose it for an easy A. I was the only one in class who was actually taking it because I was interested in going into machining. For everybody else, it was a fun class. Like, “Oh, hey, we get to cut some stuff out on the plasma table.” When getting into Dunwoody, I was surprised about the job placement and stuff like that. You don’t know about it in high school. Then, you hit college and it’s like, “We need people 90

at these shops right now!” Everybody needs somebody to work something. I found it interesting that the word hasn’t transferred over into high school yet. People aren’t being told that his is a growing field. That’s a great segue, let’s go there. Do you agree that high schools don’t counsel students much about the opportunities that are out there in manufacturing? • Part of it is like he said. It was an easy A. Kids don’t look at it as a class to learn stuff. It’s just, “let’s go have some fun, play with the robotics, play with this machine, that machine.” You’ve got to tell them, this is what you could be doing with your life. This could make you a lot of money— because there’s a lot of money to be had. Coming out of the military, I knew that there was an industry for machining; I didn’t know a whole lot about robotics or things like that. When I got here (name) told me, “I could place you tomorrow.” It’s that easy. Kids need to know that. • I was in high school a longer time ago. When I was in high school, there was kind of a stigma attached. “Oh, those are the guys who work in the metal shop; those are the guys who go to the auto shop.” There was a stigma attached to the people who were crafts people, who were handson, who were going for the blue collar types of things and such. I’m not sure exactly what the state of that is now, today. I know that because of the incredible advancements in technology that younger people today are hands-on with that stuff all the time. • I’m very familiar with a lot of the STEM programs that go to the high schools, but are the high schools equating that with metal fabrication? I know they talk a lot about the science aspect to it, the mathematics, the electronics, such like that, but are they also letting the students know that a huge part of this industry is also the people who are doing the metal work, doing the machining, doing the designing and doing that more physical side of it as well? That’s all part of that same bubble, so is there still kind of a stigma attached to people who want to get their hands dirty versus the people who are just doing designs and such? I don’t know if there is, but like I said, I know that was very present when I was young. I do know that a lot of manufacturing executives speculate on this because they can’t figure out why they can’t attract more people. • I went to high school half the day, then I went to a vocational school. I think there is a stigma still because I remember hopping on the bus and everybody’s like, “Oh, you’re going to that school, why would you go to that school?” There are people who were in there who were passionate about what they wanted to do, but I didn’t know that a two-year program 91

could be better than a four-year program. I have a lot of friends in college going for psych and they’re working in coffee shops and they’re probably not going to do anything with their lives. I already have a job and I’m almost done. It’s less money (tuition), and more money to be made. • When you look at a four-year university, too, it’s a four-year degree, but generally two of those are the general ed courses and your elective courses. How many of those years are actually devoted to your major? Whereas, come to a good trade school and you have to take a few generals, but most of your time is concentrated and spent on what you’re there to study. Anybody who’s applied to college, it’s, “Well, do I take Renaissance Art History today or do I take Music Appreciation?” None of these things are bad, but how practical is it, really? • That’s what I think people are starting to discover. The two-year schools, the vocational schools are a lot more practical and you’ll actually get a job. • That’s the reason I wanted to come here. Yeah, you have to take a couple of the generals, but that’s to be expected. I don’t have to take every last one of them. By the time I move on to the engineering degree because that’s kind of my plan right now, is to go into the Industrial Engineering after this. I’ll be able to work and just come back to school for another two years. • I find the issue is twofold. People think that these jobs are for people who are too dumb or too smart and not for the people in the middle. Also, it’s not very glamorous. Nowadays, people want to be either a doctor or a sports player, something like that. They just don’t even see it, that’s what I see. • I feel like there’s a really big push for getting an education versus getting a job. I started in aerospace engineering. I’m still in touch with my friends who are still in the program. They’re still doing their four year because that four-year degree is going to take you five years to finish because there are so many requirements. I’m sitting here today. I already am in industry. I’m finishing up in May. They’re like, “I’m still learning calc.” I think it’s pretty funny how I went out, had a vacation for a year, came back and I’m finishing up my degree and they’re still doing their degree--and they have yet to even find a job, while I already have one. I’ve gotten job offers that I’ve had to decline because I already am working somewhere.

• They’re like, “You’re doing such cool things and I’m sitting here writing a paper about aerodynamics.” I think there’s a really big push for getting a degree versus actually getting a job. Are any of them tempted to follow your path? • A couple of them actually tried to, but they were so far in their degree that it wasn’t going to be worth it. They were already at multi-variable calc and aerodynamics and thermodynamics. It wouldn’t be really a smart choice, since they’re almost done with their degree. Do you have opportunities to expose to others, to tell others about what you have here? Other people who aren’t quite aware of the opportunities here? Does it come up much with relatives or friends? • Absolutely. • Especially our field, the 3D printing, is a hot topic. You start talking about it and they just want to talk and talk and they are amazed at what’s possible with it. All the time. • My own kid just went to the U for his first semester, didn’t really like it, and ended up driving home. He’s a smart kid, he did well in high school. I brought up the idea to him. I said, you’re young, go get a two-year degree or join a trade union. You’ll make a livable wage and as you get older, if you decide you want to go back for something, the option is still there. I think in high school, at least in mine, you were pressed to go to college, a four-year college. That’s what you’re supposed to do. Some people might not be hard wired for that type of thing. • Part of the stigma was the idea of salary cap. When I started finding out through people I’ve met, particularly in some small companies, there were people that got in there with two-year degrees, worked really hard, learned the business and moved into higher level roles. In one case, I know a guy who became a partner and did really well for himself. How much of it is mom and dad oriented? Mom and Dad think I haven’t succeeded unless my kid goes to a four-year degree school. • I got that a lot. Between my parents and their siblings, there was a big sibling rivalry. My kids this or my kids that. In high school, I went for welding and metal fab through the tech college program and yeah, there was definitely a stigma for my mom for sure that, “Oh, you’re just going to be a dirty welder.” How is she now? 93

• She’s seeing it a lot better now, but she’s matured also. • My parents were like, “You’re going to go to a two-year college? You’re going to do what?” They were very ... what’s the word I’m looking for? Traditional. They were like, “You’re going to become a doctor, you’re going to become a lawyer.” I’m like, “no.” • I came from the exact opposite end of it. My father was a stone cutter. He’d been a mechanic in the army, then he became a stone cutter, then he formed his own business. I was the one out of all the brothers who wanted to go to college and they were not particularly supportive of that. It’s interesting now, years later and my father has passed away, but when I started here, my mother was still with us. The comment she made was, “Well, that’s an interesting compromise that you probably should have done the first time, it would have made your dad happier.” Okay, you’re going to college, but it’s technical college. To your query, I think it completely depends on the kind of family you come from, what their demographic is. Have they been tradesmen and craftsmen? Have they been white collar or blue collar? Where did they grow up? I think that’s what’s going to influence a lot of it. • Back to the idea of how do you communicate it to the high school kids, I think some of the parents then have to be educated, too. Just because they have that traditional view point of you’ve got to go to a four-year college, get a degree and such like that, I think the kids seem to be getting a little bit more aware of what is practical to get. Maybe, it’s some of the parents, depending on the age group and such, who need to be shown, some of these four year degrees, it’s a wonderful thing, but they may or may not take you anywhere. Why don’t you look at some of the more technical things or the more vocational things? Teach them the value of that so that that can then be handed to the kids. • I have to agree with you. I mean, my dad didn’t even go to college, he just worked his way up in the printing industry. My mom went to a technical college. She’s a lab tech, has been for, I don’t even know how long, probably 40 years. My brother went to NEI for electronics, I think he said it was actually part of Dunwoody, a few years ago. That’s another reason I came here. My brother was part of it. My sister went to a technical college. She does hair for a living, she owned her own business for a while. It kind of runs in the family, a four year isn’t necessary. You can make a good living coming to a two-year degree. Let’s say you own a company, a small manufacturer in Alexandria and 94

you’re having trouble finding any kind of worker, not just people with specialized training. What’s your advice to them, having gone through this? What should they do to make their businesses more appealing to a new generation of employees? • Offer training. That’s the first thing that just popped into my head. If you’re a small company and you can’t necessarily maybe compete as far as wages or certain kinds of benefits go, what else do you do to get the people who have the potential or who already have the skill sets? What can you offer them that’s still going to make your bottom line doable? I would say right away, push that. Offer training. Offer internships through school, possibly even a little bit of financial reimbursement for that. • I know there are a lot of companies that do it, in relation with Dunwoody, I’ve certainly looked into some of those. Get them early. Come in the first semester, the second semester, that way you don’t have to pay them what you would have to pay someone who’s already graduated. Help them get through school, help them get the training as it goes. That way, you’ve got somebody who, by the time they do graduate, has this wonderful skill set and if you’ve developed a great relationship with them already, they’re going to want to stick around. That’s what I would say to a small manufacturer who can’t just throw money at it. Get involved with them early in their education and help them develop that. A lot of communities are sponsoring “explore manufacturing days” to expose students and their parents to manufacturing opportunities in their hometowns. Parents will see that manufacturing is not that dirty, dark place they thought it was. They see first-hand that manufacturing jobs are high-tech, very sophisticated jobs now. • We did college tours, but what you’re talking about would have been very beneficial. That way you get a taste for it. I don’t think people fully understand what is actually happening in manufacturing. Talking about it in high school, nobody really understood what I was talking about. My dad does it and my uncles and stuff, so I had some background in it, but it was very rare to find other people who knew what I was talking about and were accepting it, kind of. • I’ll explain what I build at work or what I do. They’re like, “Oh, I didn’t even think of that.” People don’t even think of what needs to be made. • They take it for granted? • Yeah, they just don’t even notice it.

• I think we have a problem with rural living. We’re not the culture that we used to be. There are not as many farmers. There are not communities or outposts, the way there used to be. Young people who are starting a career probably are not as likely to move to Alex, if there are no family activities, if there is no cultural center there. It’s just less likely to be appealing. You mentioned gender in all this. Is it a factor? Are female students not communicated to enough yet? What do you think? • I think you have to have an inclusion based on what language you’re using, what sensibilities you’re appealing to, because if you want to keep shop floors a “dude-bro” environment, we’re not feeling welcome. We’re not like, “Oh, yeah, just throw me in there with the sharks.” You can’t have both worlds. You can’t have this brotherhood. I get that more veterans are men. I think it’s great that they take their skills, they get help with the education funding and then they find themselves in a career, maybe just starting a family. I think that’s terrific, but I think that you can’t have it be your own sector, just for one gender. You can’t keep thinking of automotive as “man’s work.” We can all be good at the same things, it’s okay. Do you see that evolution in those attitudes and the culture around here? • Around here it is tough. A lot of people are fresh out of high school. You have people still developing into the individuals they will be as well as people who are not traditional, who have seen more of the world and realize that whatever you think you’re guarding by having those attitudes, they’re keeping people away and they’re keeping your experience really limited, if you’re not including folks. • Engineering’s really male-dominant, so I took it as a challenge. I was like, “I can do that, I can do what they can do.” I took it as a challenge. I took autos, I took woods. Even in the group I am in now, I’m in the materials testing group at and there’s only one other female student in my group—and she’s actually leaving for maternity leave. I’m the only female student there and currently, I’m the only woman in the class. It’s a nice challenge. • I agree, it really doesn’t bother me. I used to work at a shop where I was the only woman. It didn’t bother me, they didn’t treat me differently. Occasionally, I need a little help lifting, but it’s not a big deal because we all help each other out. Just because I’m a woman doesn’t mean I can’t weld. I don’t see how that has anything to do with it. The shop I work at now, we have almost as many women as men in there. 96

What’s the next step? Do you see your career path any differently now that you’ve been here? Have you seen other opportunities that you never anticipated? • Yes. I’m being trained for things I would never have even thought of. I find that fascinating and actually very exciting. I have certain goals and certain ideas of what I would like to do. Now, I’m finding myself opening my mind up to other potentials as well. It’s like, “I could try this or something like that.” I think that’s amazing. Every month that I’m here, I discover more and more possible directions that I could go. Sometimes, it’s even a little overwhelming, but a lot of my nervousness having a mid-life complete career change, is when I get out of here at my age, how employable am I going to be versus some of the younger folks. Let’s look at this from another perspective. This type of education and these types of careers are maybe not for everybody. Are there classmates who conclude this is not what I want to do? • I’ve noticed quite a few. We’ve lost seven, maybe eight people. A lot of them were given a directive by their parents, we won’t keep funding your lifestyle unless you go to Dunwoody, my Alma Mater. It didn’t work out so great because they weren’t ready, because this is rigorous, because you’re just totally immersed in this. For me, it’s very foreign, but I think there have to be people encouraging, but then you have to have the tools to go look for the help you need. It’s still not hand-delivered. They’re not going to give you a tutor and sit you down, strap you to a chair. • We’ve seen it in our semester, too. We’ve lost a good handful of folks. I think the biggest chunk was people just out of high school who weren’t ready. They weren’t ready and their parents were pushing them, you’ve got to do something. Get a job or go to school, one or the other. I think some of them came into it thinking it was going to be a lot easier than what it is. You get here and all of the sudden, you realize no this is not easy. There’s that hands-on aspect in the way it’s taught. • I’m still trying to play catch-up with some of the mathematics. It’s been a long time since I’ve done math and there’s a lot of it. You do have to have some brain power. Again, that whole stigma about trade school. It’s like, “Yeah, well you come and try to pass some of these tests that we take in trade school.” I hope you’re up on your advanced calc and trigonometry. This stuff is not easy and I think that’s what we run into, too. People come into this, whether they’re coming out of high school or coming out of the military or something like that that think, “Oh, I’ve already done that. It can’t be that tough.” Then, all of the sudden, two months in, they’re like, “Oh, my God!” 97

• That’s me, high school Algebra 1 is as high as I went. I hadn’t done any math until I started here. It was a big culture shock. How did you do it? • It was a struggle, but I made it through. I have good grades, but it was a lot of work. Even now, I will be going through things in class and I get the concept down just fine, but the basic algebra is what I fail at. There’s an education gap. I mean, it was my fault, too. I was in high school and I was just going to go make things. It was all going to be hands-on, I didn’t need that math. Now, I’m finding the errors of my way. • I think what’s probably helped with you and certainly with me, too, is that at this school, in particular, the resources available to those of us who need to play a little catch-up are incredible. The teachers, the tutors, the access or the direction toward outside sources, I’ve seen it every week since I’ve been here. Teachers who are willing to go that extra step to help. The school is definitely designed for students to succeed. It’s not designed to weed them out or anything like that. It is designed, if you’re willing to do your part, to put the effort in, everybody here is going to help you. • I completely agree. • Yeah, this environment is awesome for that. Like you said, they don’t hand it to you. You’ve got to do your part. • If you’re willing to put in the work, they will see you through it and they’ll make sure you learn, not just you glazed through it. They’re not shuffling people through here. When you get done with a class here, you know stuff. • I had a really hard time when I was in my aerospace engineering start. It sucked, I was in a class with hundreds of people. You try to ask a question and they don’t even see you. I mean, me being tiny to begin with, you don’t get seen, you don’t get noticed. Here, every day, I have some sort of question to ask. I have hundreds of questions just to make sure I fully understand it. It’s just awesome, that one-to-one, teacher to student. You’re able to talk to your instructor. You’re not just a number or a grade. You’re an actual person. The instructor actually cares about you and your grade and how you’re doing. It’s a really awesome environment to be in. • I couldn’t agree with that more. Coming to the open houses, I talked to (name) about small class size. You’re not going to go to the U of M, where like she just said, they have a hundred people in a class. If I have a 98

question, I want it answered. One last question. For the vets in the room: Has military service better prepared you for this experience, both for what you want to learn and for what you want to do with your education in the workforce? • I don’t know. I was in for so long, that was all I knew. My plan was I was going to retire after 20 and stay in, but plans change. The biggest thing for me was I didn’t know how to go to school. I was used to hearing “this is what you’re going to do, this is when you’re going to do it.” It felt like total freedom. I can pick what I want to learn. I didn’t know how to do that. In many ways, it’s not as bad as it could have been if I didn’t spend so much time in the military. I don’t know. • I think it would have been worse for veterans if they go to a big school. Like, if you go to the U of M, there are a hundred students in your class; here there are something like 22 in a class, or maybe 30. We talk to our teachers one to one. They know where we’re coming from. We’ll talk to (name), he’s a veteran. I think most of our instructors are. • (Instructor): That’s one of the unique things about the manufacturing department at Dunwoody. I bet about a third of our faculty are veterans, which is kind of unique. Some of the students have been involved, we did a high school robotics seminar this fall. This goes back to the high school stigma and stuff for high school kids. Over the course of four seminars on Saturdays, we had probably 20 or 30 high school kids each Saturday, so maybe 120 high school kids over four Saturdays. • There was one particular young lady I met at one of these high school seminars in the machine shop. She was just kind of walking around and I knew that she was kind of lost. I asked, “Can I help you?” She says, “I’m in love with this place, I’m absolutely in love with this place. I learned solid works, you guys have got 3D printers, you guys have got CNC machines. I feel like I could design it and build it.” I said, “Well, that’s what we do here.” • I started talking to her about women in technical careers. There’s a scholarship we have for women, how you can apply for that and stuff. I was interrupted by her mom. I was interrupted by a mom who literally pulled her daughter away from me and said, “She’s not coming here. She’s going to be a Badger.” I said, “What?” What does being a Badger pay?” She says, “I’m a University of Wisconsin alum, my husband’s a University of Wisconsin alum. We give money to the school. She’s going to the University of Wisconsin.” I don’t know that I can fight that. I don’t know if 99

there’s anything I can do to fight that. • I think you’ll see her in 10 years. • I wouldn’t be shocked. Once she fulfills her familial obligation and then wants to learn how to make stuff, come back.

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FOCUS GROUPS

White Bear Lake February 24, 2016

The Specialty Manufacturing Co.

In last year’s State of Manufacturing® survey, a remarkable number of manufacturers said they were very optimistic about their company’s prospects for the coming year. What’s your reaction to that? Were you one of them? • I feel that maybe we were just fortunate with certain customers and opportunities but we grew 27 percent last year—and the same this year, so I feel fortunate. • What happened during the year that you expected to happen and was there anything that you didn’t expect to happen? • We have a lot of long-term contracts. It takes several years and then they go into production, so for us it’s easier to know the next couple years but it’s harder to get beyond that. We have to sow seeds and wait for them to come into production. • We grew 36 percent and I hope we don’t do that again—it’s hard to try to control but it was good. I think this next 2016-17 we’ll be in the range of Sponsor: Ridgewater College

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eight to 10 percent. • Most of our core customers did very well and, therefore, when they pay you a couple thousand dollars in tooling and you figure you’re going to ship five a week, they come back and they maybe go 10 a week or 20 a week. They already paid me for the tools to produce so you had no choice in doing it, of whether you’re going to lose that customer for good so you’re forced into it. Any other 89 percenters? • We were at about 35 percent growth. It’s an interesting market because it’s still in recovery and based on the way we’re growing it’s still not at the peak it was, so a slow steady increase each year is 35 percent. It’s still not 75 percent like it was the year before so we’re heading toward that more predictable state where it’s a place of heavy equipment, utilization, and age. For us, in heavy equipment manufacturing, in the downturn people would run their equipment longer and it would become de-leveraged. • It’s smarter, more methodical growth with very short lead time--that’s been our challenge. We’re not getting orders out way in advance; we’re getting them much shorter than it’s ever been. The growth is nice but it’s turbulent because it’s not as predicted as in the past. Our business runs parallel with housing. Generally, it’s a good, steady, stable growth but it’s very cautious which makes lead time shorter, makes our production cycle and our lead times under stress throughout our supply chain. We have to make investments in order to deliver sooner, so the leverage really is moved back to manufacturing unless you can shorten it. • We’re linked to the construction business. It’s going up but it’s still less than 50 percent of where it was. I don’t think that anybody in the business wants to see it get back to five and six just because it was insane, but we’re still way down in numbers. Would you have described yourself as being in that 89 percent last year at this time? • Yeah, we were on our way upward, probably 25 percent up from ... 30 percent up from a year ago. We were down 75 percent at one point so there’s a lot of room for growth. • We have three major divisions in White Bear Lake and two of them were doing very well. The year started out really strong and then it started waffling around March, April and we were wondering, “What’s going to 102

happen again?” It started picking up July, August through the summer like the last quarter and the first quarter of this year so it’s been, “Okay where’s it all going to go right now?” It’s been up and down. How optimistic are you about this year? • Our January was very, very slow, off probably 15 percent from where we projected. February started off well but now it’s lagging. Our deliveries are same day service to a max of three days. Our booking orders are very, very tight, so if the stock market hiccups we seem to hiccup for some reason. We predicted growth but we’re surely not feeling it out of the gate. • We’re not anticipating much in growth at all. While we’re getting some steady business that keeps us on track, we’ll be happy with just a very slight increase this year. • We’re doing tons of quotes. • Quoting and quoting and quoting, even last spring we were getting quoting upon with quoting. They keep deferring the decision. What will you charge me for deferring my answer? Which is the cost of lack of decision-making. There are a lot of manufacturing executives in this room who have been through their share of recessions. People didn’t really see the last one coming. Did you learn some lessons out of 2008-9 that make you better prepared if the economy suddenly turned sour? • It’s the same cautiousness our customers are showing. We’re not making the big purchases because we’re not very confident about the economy. Last time, we saw about a 90 percent drop in three months, so the changes can happen pretty fast and there is no way to plan for that. • I really wanted to manage differently than get one to go through 2008, 2010 over again. I’m bound and determined that it has to be different, I have to manage differently, and that’s what we’d like to do is to manage differently so there are things that we’re doing differently now than we did do before. Like what? • Systems and processes. I wanted to make my financials stronger and I wanted to have more of a market share. We successfully did both of those by changing systems and processes. It’s managing really very, very differently than what I did before. We have a strong leadership system now that we never had before so it’s a whole different story but we do things 103

differently. • The word for us is scalability. When you go down 90 percent and you know it’s going to get better someday and you hold on tight. You’ve got to be more scalable on the rise so that when the froth comes off the core is still there. We’ve added more technology. Does uncertainty keep you from making capital expenditures? • It makes you rethink them. Whenever we get a little blip, we try to do more with less. We’re looking at capital expenditures in the right place but more of it to add technology and things to get more done with less. • I would like to automate more with robots and things like that (names) say, “Not right now. Why don’t you get the processes running on the machines, we’ll do it manually with a person standing there and make sure everything’s hitting on all cylinders and then maybe we’ll think about that $400,000 robot.” It’s a difference of cost. • I can throw a lot of temps at that at this rate and have great flexibility. • We’ve actually seen higher wage increases pressure in the bottom than we are in the technical side, which is puzzling. • You’re up against McDonald’s, so we’ve had to figure out how do we can be as efficient and effective even down at that lower-end jobs. At the same time even with higher wages, I’m not willing to commit to automation, a fixed expense. I’ll live with the wage issue on the short term. • You get variability out of the process and run them with a lower-priced person. We’ve done some Training Within Industry, the Rosie the Riveter thing, and it really does work. It takes a lot of up front work to get that all spelled out so they can go line-by-line and learn how to set up a certain type of machine, but that’s what we’re trying to do. • My challenge is with skilled help, so we put a lot more money into automation, sold six pieces of equipment and bought two and you look for that advancement factor—it’s got to be three to five times faster than a piece of equipment and your labor, your skilled labor, has to drop by five times. That’s what we saw with the money and the ambition. We lowered our requirement on skill. There are some that went up a little bit just because you’ve got to learn how to run the equipment and program it but we just can’t find the skilled help so I’m putting the money into the automation. 104

What about the skills gap? Still a source of heartburn? • Its getting worse. Much worse. • We’re losing 10,000 baby boomers a day now and we’re not replacing that and all of the baby boomers are very, very experienced. Just getting the kids into schools and things like that, I think the message has gotten out there but they’re behind. • I’d say in our industry we’re seeing the same thing with the skilled help. It’s hard to get people because of the techno people we get from vo-techs or tech colleges now just there are just not as many students as there used to be, so we have to pay more. We’re also getting pressure on the lower end. Just last week we were getting an inrush of people putting pressure on us they’re going to leave if they don’t get a raise on the lower end of the spectrum, our contract people and what not. Are you less profitable today because you can’t find a sufficient number of people? • I don’t know if it’s gotten to that yet. We’re fairly busy so we’re able to hold our prices but we’ve had to go back to our customers and do price increases too and that doesn’t go over real well, but it’s necessary. • We had a challenge with not only finding people at various levels, it could be a skilled position or it could be just a painter’s helper. We brought on 110 people and kept 50 and we bring them through a temp-to-perm relationship. • We found because of the wage increase, or inflation, we had to convert those 50 to full-time for retention purposes, so we had a double whammy. We couldn’t rely upon the temps because they were shopping and going to wherever they found the highest wage, whether it was McDonald’s or right next door here. That cost of turnover was making us less profitable. Our on-the-job training was just brutal, it was killing us, it was nearly 15 percent. We decided to just take the best and convert them to full-time but let’s make it scalable where we’re only taking the best. We got to the point where we haven’t had to hire since last July. There are little changes in there but yet the growth is still there. • That’s where it came back into our efficiency and making an investment into a permanent person in a better process as paying the dividends because we were just churning and spending. The temp agency was getting rich and they just kept sending more bodies, and we kept churning and churning, 105

and we were paying this all in our on-the-job training that wasn’t sticking. Then we had gone out to the schools and we worked with both White Bear and Vadnais Heights and really got out to the schools and then in the trade schools to really market the roles. It’s just not sexy. It’s not computer design. • How many people go on the Internet and look inside (company) or look inside (company) and go, “Wow?” I bring candidates on a factory tour. That’s where I do my interviews. If you don’t get excited about it, I don’t want you. Even though you’re going to just be staring at numbers, you got to love what we do and so if I see them get hooked on what we do out there, and I think the same thing when we hold open houses to bring students in. There are plenty of guys and girls who are 19, 20, 21 years old, they would never look at us because they don’t understand what it is. Our engineer could work with the various schools to bring them in to see what they can build and what the application is. We simply tell people, “We participated in the building of the Vikings stadium, U.S. Bank stadium.” You would have been invigorated listening to the focus group we conducted at Dunwoody. Those young people—and they weren’t all young people—were invigorated, they were happy, they were enthusiastic, they couldn’t wait to get out and talk to people about what they’re doing. • Sure, all of these comments really help walk around where we’re at. The challenge we’re all feeling is number one, it’s too hard to find people. Attracting is a huge challenge. Second, every organization needs to get the full return out of every employee they have. They need them all to make the best contribution possible. The third major part of it is, is you can’t afford to lose anybody because you’re back to point one which is it’s too hard to find people. As we looked over the course of the eight years of the survey, work force has always been a concern and year-over-year it’s been increasingly more of a concern. Then in the last couple years one of the things that struck me myself is that every other industry is expressing the same thing that manufacturing’s expressing. • It’s not just that manufacturing’s having trouble finding workers, so is construction, so is banking, so are other professional services, government, all of those industries, healthcare are all looking for the same people of which there are too few. To Tom’s point, one of the things that Enterprise Minnesota’s been paying attention to is what else does an organization do since for the past 25 years every effort to leverage growth has been based on leveraging people, they’ve gone together. If we’re going to grow, we add people. We do other things but those two were directly connected. It 106

came down to four pieces of puzzle that are integrated for us, the first piece being strategy. • Organizations that have a clear vision for where they’re headed, I think to (name)’s point, have something to say to the people who are there and to the ones they want to attract. “This is who we are, this is what we do, and this is exciting, and we want you to be part of it.” Strategy helps put that language together, not only the effort to say, “Where are we going,” but the effort to articulate it and communicate it well. The second piece of the four is the talent development and you’ve touched on some of the training challenges. While the training has gotten to be far more sophisticated in that it’s not just the technical skills of what they do in the job that they’re on but it’s also what we refer to as the essential skills about the way that they interact with each other. The leadership skills about the way managers lead and help drive recruitment because the employee base wants to be with those leaders. • Then the other two pieces you already know, it’s the management system and, (name), you were talking about management systems. We think about ISO as probably the most visible management system but to be able to have structure in place where the organization understands how things work and how we leverage growth? Then the fourth piece is continuous improvement which every manufacturer has been on but we’re recognizing that many manufacturers have been on it at a base level. In the shop floor, all production on basic elements of process, there are many levels to move up on. First of all to get out into engineering and sales and admin and also to be thinking about more sophisticated ways of continuously improving, again, to get a better return, so it’s all of those pieces. I’d like to drill into each one of those but we’re going to run out of time so let me just talk about one, ISO, ISO 2015, that it’s different. It’s a dramatic departure from what we’ve worked with before. What’s your sense of it? Is it something that you’re going to embrace as a company? • We’ve been ISO since 1996 and have a very robust system. It’s not high-performance, it’s not made to be high-performance. It’s made to establish a baseline in consistency and you can get better, you can improve your numbers with consistency, obviously, but it’s not high-performance. • We’ve been efficient and effective and we’ve been doing lean and process improvements and just in time so we used that time. We’d also thought that some of our customers might find that as a differentiator. It 107

didn’t really differentiate us or get us additional medical clients or other stuff. Is it good for process improvement internal best practices? Yeah, and we’ve done well with it, but it hasn’t been something that we could point to, to say it made us feel like we were a higher performing company. • There were a couple of military customers who said, “You’re going to go to the bottom of the list for getting our work if you’re not ISO,” so that was a little something to think about. Has anyone taken on 2015 yet, the management standard? • We’re looking at it. As a medical device manufacturer we’re required, we even have an option not to. We’re also 1345 the next section of ISO, so for us it’s just in our structure and how we work and it’s been a good system for us, but I can’t really speak to it because I don’t have choice, you know? • I have my business as medicals so I couldn’t do any of that without running it but it’s a good framework for all of our improvements, and our continuous improvements all run through that, so it works as a good system for us. • It won’t change your financial situation, it [inaudible] keep it consistent and you bring on new people. It’s a good way of training new people, get them up to speed to make sure that A, B & C, that B is doing it the same way that C expects it, and A is going to deliver it to B the same way he’s most ... The consistency with new people but it’s not going to gain market share. Let’s talk about some other factors that every year seem to affect manufacturing. What about foreign competition? • For us, personally, it’s much less than, I’d say six or eight years ago. This big threat, for us, was China. Today it’s not half what it was six or eight years ago, in our experience. • Anybody else? • Yeah, it doesn’t seem to be the same fear that it used to be. We have divisions all over the world, we’re trying to fight the competition of the country that you’re in so it’s a little different structure. Probably the exchange rate with the euro is probably the only thing that has really ... That we have some concern because there are some good competitors over there that operate in the U.S. also. The fear factor in talking to different customers and different people doesn’t seem to be there like it used to be. 108

Various industries, the die industry or mold industry or a variety of other industries, so it seems like a lot of stuff has been back on-shoring versus off-shoring which is all of our business. • There have been some new entries into the market. They’re not always from the Asian markets. Some are coming out of Europe as well, but entry’s pretty high but it does put price pressure on it because it’s an expensive piece of equipment, generally. It’s a very contentious market and price becomes a topic of discussion and you have to go back to the value proposition. For us, I think what combats that is technology. In a slow, steady, climbing market you’ve got to differentiate yourself with the different technology. What about changes in the supply chain? • I’m in the construction industry. We’ve seen massive buy-ups of lumber dealers and things like that and it’s changing the way our business is even being done. What used to be a mom and pop local lumber yard in Spooner, Wisconsin is now owned by an investment group on Wall Street. We’re not talking one or two, we’re talking hundreds of these things being sucked up at a crack and it is changing. What it’s going to do is yet to be seen. We are seeing a massive reduction going on. They’re weeding out the weak which is changing the landscape faster than anybody. • We’re seeing a consolidation very rapidly in the construction industry. • It’s changing the way they buy. They’re buying now as a national group as opposed to a regional buyer. When I say that, we have lots of working relationships in probably 10 states is our general distribution. Where now all of a sudden out of the blue they’re buying from someone else. Some guy 1,000 miles away is making the decision on how this company’s going to do business so your relationships you built up over the last 10, 20, 30, 40, 50 years are out the window in the blink of an eye. Is it increasingly reduced to price? • In many cases, yes. Somebody somewhere decides that they were buying product A from company A. “Why?” “Because we decided.” • The good news, though, is then you can ride with that, you can grow with it and try to roll up underneath it. I will add we’re experiencing improvement on the logistics side of things. Moving product around the country or around the globe is absolutely more efficient than it’s ever been in my opinion. There has been some consolidation there but you can get things moving and tracked and know where they are throughout the world 109

much better than it’s been in the past. Part of that is the consolidation, part of it is technology. and it’s also, it’s the shortening link on the supply chain. If you’re invested in the technology and you have ability to remain, then you’re a container and they’re monstrous. • They’re expanding canals down in the Panama Canal and then Nicaragua. There is just tons of stuff that’s going on to facilitate the movement of product around the globe so there has been some benefit there. Transportation costs have compounded with the currency because at the moment intra-Europe is cheaper when you’re selling a dollar back here in the states. Then once you’re in U.S. dollars, getting it to the port in the U.S. and then moving it. As long as there are not any strikes at the ports. What about government regulation? • I’ll tell you guys a short story. On someone’s health insurance campaign 9-1/2 percent more than they’re making, right? Okay. You got someone making $15 an hour and if he’s a single and like 46 percent of his health insurance per month, he’s right on the verge of that 9-1/2 percent being his insurance payment, health insurance payment, right? It’s based on annual salary. Now, what happens if that individual gets hurt at home and he’s not at work? His annual salary goes down, right? It goes down below that so that his health care is more than 9-1/2 percent. • He files that he wants subsidy. They come back to us, what they’re doing right now, and I’m going to get a fine of up to $2,000 because of him not being able to work. Not for the Workers’ Comp because he got hurt at home, annual salary went down from an insurance standpoint more than 9-1/2 percent. Now, I’m going to get a $2,000 fine. Now the monkey’s on my back to go and fight. • Another horror story. We’re a high-tech company so we have a huge investment for audits and technology, and we are eligible for something called an R&D tax credit. Filing the paperwork costs 40 percent of the credit that we get. That’s screwy and it takes the State of Minnesota two years to act on giving you your credit back, so what kind of incentive is that? We have to hire a professional CPA firm to do a study that’s this thick. • It’s nuts, it’s nuts, because here you’ve got this advertising incentive to invest a forward-looking economy creating products which would help everyone here compete better, enhance their margins, and compete against foreign trade and domestic trade. When you have that incentive but then you can’t get it.

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• This was a private company and the Attorney General of Minnesota should investigate them for false advertising practices. I’m serious because when I look at all this stuff that we get, we don’t do it because we’ve seen enough work on the back end that overwhelms the benefit. We sit there and think, “Well, we got into it for this simple understanding program,” and now we sit there and we think, “God, we’ve got to do this, and this, and this,” and then the money’s way, way, behind the curve. • It’s not the case with us. I had $1.4 million in R&D and it saved me $110,000 last year, right off the bottom line. The study was thick but I paid 60 grand for the study but I got way more than that back. It was a good thing.

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FOCUS GROUPS

Minneapolis February 24, 2016

MPMA

Let’s start by thinking about the State of Manufacturing® survey, in which 89 percent of the manufacturers surveyed said they were very optimistic about their business’s prospects for 2015. That’s a very large number. How many here were among the 89 percenters and how did that work out? • I know we were one of the positive ones last year. We’re having a very solid year. It is playing out. One of our biggest challenges is that we have more business than we can actually handle. We’re actually having to turn business away, which can make it difficult. The reason we’re turning it away is capacity of people. Those are our two biggest challenges right now. Was your growth due to the strength of the overall economy or something beneath that? • From what I can tell, our customer base had been sitting on things for a while. When they felt better, they started putting more inventory on the shelves. That’s what’s been driving a lot of our business. We’re in med device and aerospace. I think a lot of customers had been giving us just what they needed to make deliveries, and now what they’re saying is we’ll make deliveries and we’ll be on the future a little bit. Sponsors: St. Paul Port Authority, MPMA

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• We predicted that last year would be a very good year. It was. The last two years in a row were record setting years for us. Last year we picked up several new customers. We entered into relationships with bigger shops than ours that were over capacity and needed help getting things done. Even better than you anticipated? • It was better than my owner anticipated. I predicted the growth, but I’m the one who kind of drives things there so we set some goals and we achieved them. We could’ve done more had we had the people. • I agree. Our main constraint is finding the right skill sets. That’s what continues to be a challenge. For our world in particular, the people coming out of school today are not the answer for us. We need training but we need experience as well. • I’m pretty close to four companies in this area. One of them serves agriculture. They were thriving in the early part of 2015, they quit thriving. One of them is a medical device company and they are doing pretty well— it wasn’t a record year, but it was a good year. I think a lot of people see a shrinking back log in 2016. It’s a little too early to tell. • For me, the first quarter of last year was extremely flat but started picking up in April and it’s steadily gone up. We’ve got a record backlog. • I would echo that. We got out of a couple of markets because they were dying or declining. We got out of the mining industry. We had a small play in that and it just seemed like we were spending more time focusing on that and not getting the returns, so we decided to focus on other aspects of our business. That was part of our growth as well. What’s your sense of optimism looking at 2016? • We’re looking at a record backlog again, much like you’re looking at. It’s actually a little bit frightening, because I start doing the capacity calculations and the two numbers aren’t matching up. We’re having to get very creative to try to keep peace. Our backlog continues to grow, so for us it’s a very positive thing. • Same with us, January started off a little bit slow, but all of a sudden from February, we booked so much work that it’s ramping up a little bit more every day. The thought of backlog does get scary because we can only ask the guys to work so much overtime.

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• Last year, the majority of our people were on overtime for the entire year. Everybody who wanted it had it. Now we’re back to that in February of this year. Does the extreme volatility in the financial markets give you any pause with regard to your business? • You have to be concerned. Our whole US economy could crumble to pieces. This whole oil problem, there is definitely a big correction coming. It’s hard to know. You have to be a little skittish about what’s coming down the pipe. Does it make you more cautious in how you operate your company? • Yeah, a little bit. My owners watch financial markets pretty close. It does cast a little bit of a shadow. We’re still cautious and optimistic, but we still believe that this is going to be a very good year for us. We’re not planning on putting on capital expenses like we have the last two years in a row. We’ll concentrate more on stabilizing and training our employees and making our processes more efficient. Anyone else holding back on capital expenditures? • We did a big investment this year. Without hesitation? • No hesitation. Nobody saw the recession of ’08 coming and it hurt companies in different ways. Were there any lessons in that experience that caused you to run your companies differently? If another black swan recession hit us, would you be ready? • Prior to the big recession, we tracked several economic indicators that would tell us whether we should invest or not invest. That was really a slick system. After the recession, they all kind of closed up. We’re tracking exactly or we’re not tracking at all. It’s been a challenge for us to know whether we should go up or down. You know, should we hire? Should we not? Should we invest or not? It’s gotten more complicated and we don’t really have a good resolution to that at this point. We’re hoping it’s going to level out again. We’re going to have this leading indicator on the chart where we’re, okay get ready, here we go. It was kind of magical there for a few years. • Well at our companies we’ve greatly improved our processes. We put in a much stronger management team and now we’re really focused on sales and marketing type efforts. The operational aspect of the 114

business is getting fine tuned but we’re really focused with expanding our markets in news areas. • Before my time, I think our shop got bitten by the last recession pretty hard. They cut their work force in half and they had a fair debt load. We’ve operated pretty much on a cash basis. We want something, we buy it, but we pay for it. We don’t do too much on credit. We pay for just about everything right away. If a recession hits, we’ll be in a better place. • What has happened to some of your competitors? Are there as many people in your business as there used to be? • There has been a lot of fall out. • That’s what I think, too. To some extent, that’s going to make it a little easier for people to survive because there are fewer people. • It’s been surprising how many companies have disappeared. • I would say we’ve become much more digital in our focus, trying to make sure that we’re backed up that way. Then we’ve also upped the revenue for employee expectations and instituted more automation, so we’re trying to get ourselves prepped in case something does head south, we don’t want to be as reliant on manual labor. A lot of our capital spending is going toward automation at this point. How many of you expect to grow your work force this coming year? Is the skills gap your biggest challenge or is it just a lack of people who want to work? • Yes! • It’s more than skill. People want people to show up and they want people with good work ethics, in addition to the skills. • There are people but they aren’t quite the right ones. • I agree. We’ve got a pretty good crew but I know we had one machinist, he would come when he wanted to. He’s not there anymore. He was a great machinist, but he just didn’t want to show up. • Which is the bigger problem? Lack of skilled people or lack of responsible people? 115

• Lack of responsible people, if they’ve got half a brain you can train the skills, you can teach somebody if they’re willing to learn, but if they’re not willing to show up to be responsible you don’t have anything. • I’d say that’s true for us on the one side of our business. We’re able to bring in people in and get them up to speed on some of the inspection process. For the last three years we’ve been automating. We’ve automated those simpler parts. It’s helped us and hurt us, right? Now what we need is more skilled labor because the parts that are left are the ones that I need the really technical guys for and those people just don’t exist at the level I need them to exist. Some experts have concluded that the skills gap is due to demographics as much as training. There just aren’t enough people. The proper solution might be in automation or leaning up your operations in other ways. Agree? Disagree? • I’ll give an example. We get a lot of machinists out of Alexandria Tech. They do a great job of training their people both on soft skills and on the technical side, in their first year of class, they’ve got 30 individuals, in the second year class they’ve got 31. By the time those young people finish the first year of class, they’ve all got five job offers. We’re going to have to do a lot of internal training, which for our company means a lot of apprenticeships and internships that are working out very well for us. • What do we do about it? We brought in a lot of automation and robots to help with that and some training, getting people used to doing that, as well. I think that’s the main part of it. I will say, the people with higher skills, they are harder to find, but, again, there are people out there if you look hard enough. • Well, I fight with (name), because we use the same recruiter, but fortunately, they’re different enough industries. Yesterday, I was at the Anoka County job fair up at Anoka Hennepin College and 600 people passed by my table. I only talked to three I actually wanted to interview, and I’m hoping to hire one. They’re all first year students. What didn’t you like about them? • I didn’t like the way they dressed, the way they carried themselves. You know a guy stops by my table and he can’t even pull his pants up, I don’t want him on my shop floor. Do you do drug testing? 116

• Always. Is that a problem with applicants? • I’ve never offered a job fail a drug test. • One of the kids that we tried to hire, a great welder, failed the drug test. It was a sad deal. Let’s go down what we always call our heartburn list. Tell me what you think. Let’s start with competition from foreign competitors. What’s your sense? • It’s affected us more because of the strong dollar. We sell a fair amount overseas, and we sell electronic instruments, so our stuff is more expensive there, and their stuff is less expensive here. • If you look at the medical device side, I’m not so worried about offshoring, as I am regional manufacturing. I think a lot of these medical device companies are starting to locate in areas outside of the U.S., and they’re locating there from both a regulatory and a manufacturing standpoint. They’re not building things here and shipping them over there, or building things there and shipping them here. They’re building them there, testing them there, regulating them there, and that’s taking chunks out of the markets that we used to serve. That would be more my concern, long-term, than the traditional, “we’re going to send everything to China and then it’s going to all go from there.” • In a similar vein, again, medical device, primarily, we saw work just stop. We didn’t sell internationally much, and we still don’t, but just the domestic market evaporated on us. It’s back, and I don’t have a feeling that it’s going to go away again. At least on the tooling side. On the assembly and manufacturing of plastic injection molded parts, that went away and it’s staying away, mainly due to labor costs. There’s no way to compete. The only time we can effectively produce medical products in plastic injection molding is if it’s extremely complex or a speed issue that we can serve, and the other loophole is regulatory. Another issue: One legacy of the last big recession was that OEMs became more demanding in a variety of ways. Did that become a way of life? • It’s a way of life. Some of the larger companies have very sophisticated purchasing policies where we’re required to give transparent pricing. One customer, I have a tender in now, and he’s asking “OK, what kind of rebate are you going to give me, 117

immediately, to win this order?” He wants me to write the check today. That’s been a challenge, for me—and a lot of heartburn. • The supply chain is much more sophisticated, but I do think it’s still relationships. They rotate a lot of the commodity people through frequently, every two year turn, or whatever, maybe more often, but I think the relationships are really, really important and strong. Has it devolved to where price is king? • Price is important, but it’s not the sole criteria. • It’s possible that there’s been an evolution there, because some of the companies that tried this ended up running some of the folks out of business, and that’s disruptive to them. I think well-run companies like Packard and Deere and others, they’re going to be a little more concerned about the viability of their suppliers. • We’re feeling more now that because the economy is doing well, they’re willing to take on inventory to manage their lack of capability of forecasting themselves. A lot of our companies have the challenge saying, “Do I need 100 or 1,000? Well, if I get a thousand, I’ll still sell them, right,” but, as the economy starts to go a little bit south, I think we’re going to find the supply chains kicking in with “I only want ten and I want them when I want them, and I want a three-week lead time.” That’s what’s hurting us in some of our sectors right now. It’s that quick turn that they’re looking for, and we’re not set up that way. • Most manufacturers are not set up for a five part three-week turn kind of set. By the way, they still want the same prices that they used to get at a thousand, they still want the same quality checks, they still want all the other things, they just want fewer of them, so they don’t have to sit them on their shelves. There’s this weird kind of balance going on right now, for us. • We’ve been debating whether we stay in that part of the business or not, but we’re also trying to structure our business differently, as well. If we can get a longer term contract, we’ll tool up a certain way so that we can match those small quantities. It’s a business model change. • Pricing is always important. But then, we’d see different pressure from the buyers for terms. “Let’s stretch this,” and lots of threats of taking huge chunks of our business away, if we don’t, but not once has that come to fruition. 118

• We had other consumer products manufacturers that we’d love to work with, but they had more of an adversarial buyer-vendor relationship, and they like to throw their weight around a little more. They don’t realize the utility of partnerships. We essentially do no more work for them. Another topic on our heartburn list is the cost of supplying health insurance to your employees. What’s your sense of it? • One of the biggest problems is it changes so much every year, and it changes within the year, and they change their mind about things. There is so much effort and so many resources into figuring out how out to stay legal, or what they think might be legal for the year. • That’s a big part of it. It is inconvenient and it cuts into productivity, when everybody has to adjust and go through the stress of a different health plan every year, because you have to shift every year to keep your rates reasonable. • Yeah, it’s been a big expense, and I really feel bad for our employees. They haven’t been made whole by any means by having their expenses higher than mine, because I’ve pushed a lot of those costs onto them, and I haven’t been able to compensate them. They’re still sharing the burden of the higher healthcare costs, directly. • I think it’s ever evolving, changing, delays, new regulations, so everybody is trying to keep up with it. Benefits are a big part of why you want to retain somebody and recruit them, and you’re not sure, can I do this, can I do this, it evolves and changes. • There’s been a lot of anxiety with the ACA being adopted and fully implemented. Then, for larger groups with the employer reporting responsibility and the tracking and measuring of that, that’s at a whole other layer of complexity that no one really wants to take on as an employer. They want to do what’s good for their business, right, deliver to their customers, not deal with government regulations. It’s a great segue to the next question. I think we’ve talked about volatility on the financial and political landscape. Does it have a net effect for your planning? • We’d probably take a different tactic if there was more certainty. We barely made it through the low times. We had some make-up work to do, as I’m sure others did as well. The metrics took a hit 119

there, and that’s the rainy day fund looking different than it did. We started intentionally building that rainy day fund back up last year and continued to do so this year in anticipation of something possibly going wrong. If there was more confidence, I’m not necessarily sure that would be the way to go. I see a lot of demand out there, but I can’t be confident of it, because of the level of uncertainty. Things can change so quickly, that it won’t be time to tack, there won’t be time to do anything else. Yeah, it’s taking a specific toll on our organization. We will grow slower, and make fewer investments, directly, because of it. • There are some things that this country, and all of us, probably, should think about. That’s the basic structure. There’s no manufacturer in all of Congress. • It’s not like that in other countries. We’ve spent quite a bit of time studying the difference between Germany and the United States. They have way less overhead. They don’t have the healthcare costs in their manufacturers, because it’s taxed a different way. Empirically, they spend half as much on healthcare per person as we do, and they get better results, they’re at least as good. All of our efforts on the matter of healthcare have been on who gets insured rather than on how much it costs, and we’re very comfortable paying six hundred thousand dollars for a radiologist for a year, when they pay maybe one hundred fifty thousand dollars for a radiologist in Germany. Those are the kinds of issues that our politicians don’t seem to get to. • Here’s how politics affects us, it’s the uncertainty factor, right. It ends up almost with the trickle down effect. I’ll use healthcare as a good example: large employers will figure out what they’re going to do to try to compensate for what might happen. They do a spousal carveout, so if you want your spouse to be on the healthcare plan, you’ve got to pay an extra amount to be on there. Last year, I had 200 employees, and 132 of them were on our healthcare plan. That meant the other additional ones were on somebody else’s health plan. • We’ve also had employees choosing where they work by how far they have to commute; and it’s not just the cost of fuel, it’s the expense, it’s the taxes, it’s all the other things they’re factoring in. I had an employee bring in a spreadsheet showing me what it cost him to get to work and where he was going to work, and wondered if I could increase his salary this much. I thought it was very clever. I thought about putting him in sales. Those are the things that affect us, as they increase the gas tax, or they increase these taxes, it’s not only money 120

out of your pocket, it makes employees make different decisions and it shrinks my labor pool. What about employee pay? There are some folks out there who say if manufacturers paid more the skills gap would evaporate. • I’d be happy to pay people more if I could get paid enough to pay those people. • Right, and that’s the dilemma there. I don’t think we can run it that way, that I start paying more, attracting better people, that our performance will be that much more that I could actually get the return investment in that. It just doesn’t seem like it will work that way for us. • I had two legislators use that argument on me. For us, in our particular business, our average income for our employees, top to bottom is sixty one thousand dollars a year. Livable wage, last time I checked is still fifty-two thousand, so we’re significantly over what requirements are. That includes overtime, and you’ve got to work hard, and all of those things, and I still can’t attract people at that. I’ve got shifts that I’m paying a 20% differential and I can’t get people to take them. I don’t buy the argument that it’s pay more, get more. • If I can go back to the skills gap: If there is a skills gap, I think, again, it’s a permanent skills gap. You can have great schools and great people, they’re just not going to be specialized enough to drop right in. That’s going to be there forever, and it’s just going to get worse. Everybody is going to become more and more specialized, it’s what they do. If we want to call this a skills gap, that’s a big problem, and try and fix it, we can, but I think that’s somewhat futile. Everybody has got to adapt to that reality in a permanent fashion. • Part of the problem with us is I’ve got 65 people, and most of them are fairly highly skilled. We don’t have the low end jobs. One of our specialties is we do shorter runs of complex devices. It requires a very high skill set. Even with a good recruiter, with somebody who knows the industry, and pre-screens real well, it’s still, when you hire them, it’s still one out of five, you’re still only at 20 percent batting average, even when you’ve got somebody who is doing a really good job prescreening. • We have become smarter about who we hire. We’ve got a pretty good database, now, of the aptitude assessments that we use, and they have to fit in a certain window, or we don’t touch them. We’ve fooled 121

ourselves and learned the hard lessons the wrong way by thinking we could ignore those, but it’s all about aptitude. With the right aptitude, we can train them. • I’ll hop on the same angle and say volume is definitely an issue, the quantity of people is a huge issue. I think a lot of the batting average comes, too, because there’s such a low volume. Finding potential candidates who aren’t employed for some reason. If there is a skills gap, I think, in my opinion, again, a symptom of the number of people available as opposed to the general population’s aptitude or abilities.

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FOCUS GROUPS

Willmar February 25, 2016

Ridgewater College

We had a terrific conversation here last year about the skills gap in general. Are things getting better? • The level of skill and training and experience with candidates has been really quite poor. We’ve seen a number of eager candidates but many of them didn’t have the skills we needed to run very sophisticated machine tools, computer-controlled machines and understand the fundamentals of basic measurement techniques, quality control, those sorts of things. • That’s been a cyclic issue in our area, historically. To have skilled employees, training programs are not nearby. The Granite Falls College had discontinued their machining training courses some time ago. That really has affected the ability to draw local talent. The training programs that are in for instance, Alexandria, Minneapolis and western South Dakota, they’re just too far away for us to attract those students. • I have a son who just graduated from Dunwoody and their machine tool program. He had a job offer after his first of a four semester program, with a local Minneapolis organization. It’s very hard for us in upstate Minnesota to be able to find classically trained machinists to work in our organization. Sponsor: Ridgewater College

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Is the company less profitable today because you can’t find people? • Yes, because that would allow us to solicit more complex products from sophisticated customers. Right now we really get pigeonholed into simpler products that are industrial, commercial type products right on the edge of being commodity type products. Whereas if we had more highly skilled machinists, we could increase the difficulty and the challenge of the parts and products that we manufacture. • I think it is a challenge almost no matter what skill level that we find as far as finding quality help that show up and are reliable and dependable. A lot of our positions we train internally because no one really knows how to do rotational molding. It’s not a trade or skill you can really train for. Even there, it’s very, very difficult to find quality staff that is going to show up on time, arrive on time and be willing to work and do the job. It is more manual labor positions. The same for our weld-fab positions. Those are more difficult for people to just want to do that manual labor anymore. That’s what we’re strongly seeing. Our easier, small assembly positions, those type of opportunities, we don’t have nearly as much turnover in those positions. Definitely the skill level is a necessity but more so than just skill is, the soft skills, the traditional work ethic skills. I imagine you have some high-tech challenges, attracting people to work for the high tech world. • We have a lot of issues finding the skill level things we needed. Today, we haven’t really grown in numbers for about five years. That’s deliberate because of skill level. We felt we really needed to up our level of capability in all areas of the company, in engineering and in manufacturing, to be able to efficiently do our job. We consciously just backed off on hiring and focused on training. We’ve rotated through some people to get ourselves to where we are. I have to say, today we are sitting pretty well with the skill levels we need. We spent a lot of money doing it. We spent a lot of time and effort getting there. Developing your own training? • Developing our own people. Finding the right people that were even a level to be able to be developed. We’re pretty good right now. We’ve been able to actually, through this process, very similar numbers in manufacturing of people but have doubled our output capability in machining, fab and assembly. Has that improved your profitability? • Absolutely. Definitely. We have a different business model. We lease our products. We lease our machines around the world. It’s continued as 124

these machines are paid for. We own them. As they are paid for, that puts us in a pretty nice position. Yes, definitely. We have a need fortunately, we have a need for a lot more equipment and manufactured, again twice as much as we’ve had in the past few years. That means those machines are out there now for us. Bringing revenue to us every day. • We are very similar to everybody who has talked here. We’re having a tough time hiring people into those technical positions, mainly machine operators, maintenance technicians, those kinds of employees. As far as general laborers, we’re having some issues getting people hired there but that’s not nearly as difficult as going out and trying to find the skill level we need on somebody running a machine or being a lead down on a floor. What about the educators here? What’s your sense of the skills gap? • The tide is turning a bit. The businesses I talk to aren’t as trying to necessarily get more people in the door. Folks are taking existing employees and up train them to do different work. It struck me that there’s not as much turnover on a lower skill like an assembly-type position versus a welding position where there’s more skill and more training involved. If people are looking at how we take in, train up and then backfill with a low skill position. Those are the some of the things we’re kind of hearing about what’s happening. Some experts are saying that the skills gap may be as much about demographics. There just aren’t enough people to train. A solution would be to concentrate on productivity, doing more with less. • Automation, robotics, all of that for a long time has been kind of thought of as replacing people. It’s not. It’s giving people another career step where they’re automating positions. • We’ve seen customers that have two people doing manual work. They couldn’t keep people because it was just so boring and poor paying. They put in an intelligent robot and one guy got a nice job boost out of it and the other guy went on and did some training and both of them now got a senior career boost. • I recently heard an economic development person say that we spend a lot of time and resources trying to attract people. If we’d spend as much time retaining, retraining and investing in our people, it could go a lot further. We have a guy who is 75 years old who we allow to work half time. We just have to figure some of that out. • One thing that happens to us—and it’s kind of unfortunate for the 125

community—we were able to pick up three very good machinists from a different business that had to shut down. It’s the community, it just passed the bond. It also is something that made a big difference for us because we have a total of ten. You pick up three that are that kind of level and that quality and, boy, you just made a big step in the area. There’s that side of it, those industries or those businesses that are not making it and those employees who are in those companies. • We have students who are in the automation mechatronics program who are Hutchinson High School students and will graduate from high school this spring and then graduate with their AAS degree in automation next December. A lot of collaboration between high schools and a lot of interest on the part of business and industry, and parents recognizing that these are very, very valuable careers. Our welding enrollment is up. Our machining enrollment is up. Our automated systems enrollment is up. Drafting is stable. Part is because perspective, there was a lot of general feeling down there that we needed to get kids to be aware. They don’t realize there are literally thousands of jobs in our community. • I think something that we’ve been very successful with is both, now we wrote our second grant through Minnesota Job Skills Partnership in combination with Ridgewater at (company) and we wrote one grant at Willmar Tech. Through basically writing those grants with the Minnesota Job Skills Partnership, we show our in-kind contribution but we get all of these amazing, amazing trainers. We brought in a big roto molding guru to train our employees because, like I said, there isn’t a program to go to school for rotational molding to help educate and advance the level of our staff. Not only have we done that on the manufacturing side, but also as you talk about developing your labor force and helping them grow, we’ve done that with our soft skills, the supervisor training, some of the safety training, the OSHA trainings, those types of items to really grow and develop our staff. That’s been a huge benefit. I know our staff is greatly appreciated that so that builds their loyalty but also we get and excel and take that back out of our community and help our staff grow and then retain them and help see them increase in roles and responsibilities. In last year’s survey, 89 percent of manufacturing executives were very bullish on the prospects of their company in 2015. That’s a very large number. What do you think? Were you among them? • No. A lot of our customer base is tied to the oil industry, the petrochemical industry, so for us, lower gas prices are not good for our customer base. That actually put us into a decline in the beginning of last year, and we’re now climbing out. 2016 and 2017, we feel very bullish in our growth 126

potential. We are really looking toward the need to develop more resources in our community to be able to be available for us. Are you there this year? Would you put yourself as being very bullish for your prospects for 2016? • It’s our segment. Everything that we do is for (company). It’s how our business is expanding throughout the world that is driving completely. • The manufacturing sector is going well except that the ag economy has certainly been holding things down to a level that we’re not seeing a lot of growth in those areas. Outside of agricultural manufacturing, I would say, yes, the manufacturing sector is pretty optimistic for my customer base. • We have customers that have contracts with us and they pay us in US dollars. Everything we do is paid in US dollars. We have had customers who have had a 40 percent increase using our equipment over the last year. • Over the last few years, the euro has changed from 152, it’s down to 114 right now. Just take the difference for them and it’s about a 35 percent difference in what it is costing them to do business with the exact same thing that they did a year ago, or a few years ago. It’s been declining over a couple of years. Yes, that’s a factor. The strong dollar has hindered us getting into some countries because we’re paid in US dollars. • From our side, we’re losing business to Asian manufacturers. We generally run on long multi-year contracts with large manufacturers. There appears to be another resurgence of offshore with some of our customers. That has an effect for us; however we’re finding other domestic type businesses to replace that. Primarily it’s the strength of the Chinese currency that has been a major factor. Depending on how they set up their contracts, they can be locked in for two, three years of savings. For them it’s significant. In some cases we’ve been told that we’ve been under priced by 50 percent from our manufacturing cost to the end supplier. You just can’t compete in any way. • The dollar changed very rapidly, much faster than a lot of us thought it was going to change. • Yes. The Chinese government controlling that. We do a lot of business in China so we see some pretty heavy effects of that. • I think we did see an initial decline because some of our major clients cut back on what they did. We’ve diversified greatly in our product mix. 127

Where we used to be 70 percent ag items that we manufactured. Now that’s strongly diversified and we’ve gotten into a lot more technical items, and did work with (company names). • A lot more is the technical side that we were able to diversify and grow out of ag. Now we are seeing very, very good things coming forward because it forced us to do more. Were there lessons of the recession of 2008-9 that serve you well today? • Our scenario is so different. We are diversified and it’s the same equipment, the same process but we’re in 48 countries. As there might be ups and downs in these countries, they’re running the other way and it levels out for us. The other thing with us is we are on the beginning of the food chain. We are working with birds and hatcheries. Because we’re on that, it is relatively stable. • Obviously with the cut back in the raw materials we had coming in the plants, we did have to lay off some people in some of our facilities. I will say happily that most of those people have been hired back. So we are back, pretty much up to full speed right now, and we’re actually to the point where we’re looking at expanding some of our operations here later this year. In fact, we’re actually expanding in one plant. • We found banking capital was very tight for expansion of lines of credit, to re-enable short-term goals. I found that in both startup medical and in industrial products, manufacturing. For the medical device, (company) were equity partners, it has been very tight. It’s starting to loosen up now, but that certainly was very clearly noticed. • When people talk about the credit crunch, I think there was a little bit of disconnected fear immediately after the crisis. Look at southwest Minnesota, when the financial crisis hit, there wasn’t a crash, because our economy didn’t go through the roof when it was peaking. Our economy is much more stable. It doesn’t go up, it doesn’t go overly far down, and then just crash. Whenever people talk about the credit crunch, it doesn’t resonate for us here in southwest Minnesota. Bankers are looking for good quality business. The demand isn’t there for business lines of credit. So I think it’s just a little bit different, depending on what market you’re in. Another legacy of the bad economy in 2008-9 was the change in supply chain relationships. Some say OEMs became more demanding. Was that true? Does it persist? • I wouldn’t say for us. We’re pretty steady. 128

• I’d say the same. • Many of our customers require us to hold stock for them and or consign in to a lease on our contract—that’s an every-day occurrence for us. I can’t say exactly when we began all those terms, but it’s continuing. It really forced big OEMs in to these new structured contracts with inventory management at the point of manufacture. They’re kind of addicted to it, so they’ve pushed a lot of the money in the work capital back in to the lower tier manufacturers. Does it mean that price is much more of a factor? • Price is a big factor still and all of our major customers are always looking at multiple source options. Every two or three years, we face reverse auctions, electronic auction events, where we’re competing nationwide for business. Fortunately, we are well positioned for high worker productivity and lower weight rates than other regions in the country. We do have a bit of a cost-based advantage, but still it becomes more and more difficult to compete as many of our customers are global producers and so they’ve cast their nets much further than the United States. How does the cost of health care coverage affect your ability to run your business? • We’re actually just going through some changes. Instead of being a joint group, we’ve got actually a split off, so one of our organizations is going to be considered a large player and the other one is having to go in the small group. Your costs go from being a large group and player, where we thought costs are manageable; we could be competitive with recruiting, retaining staff, those types of things. Now we do have a higher aging population and we provide workplace flexibility, so some players stay working for us which is great, but our health insurance is going to skyrocket. We’re still in the process of figuring out exactly what we’re going to do to de-compact that. Part of it is going to have to be employee cost sharing and part of it is going to have to be a company cost share. We’re going to have to find a middle ground, but if we did everything on age based as the small group is doing, you have to, with employees under 50. From what we were on the large group plan, now instead of having to pay $400 dollars a month, you’re paying $800-$900 a month, for that same exact health care coverage. I think the Affordable Care Act is always going to continue to be a major issue. Especially as you look at your small group employers. 129

Your large group employers, that can get negotiated rates and even go to marketing; do those things. That’s easy, that’s great, you can go be competitive and kind of play the market there but from a small group, I mean the rates are set, there is no negotiating. That’s going to be difficult and that’s going to cost us as an organization to have more difficulty with recruiting and retaining. Is it a bigger challenge today than it was say, five years ago? • Yeah. It is, I mean, there are even more of the regulations. There is so much confusion out there when it comes to benefits that you’re spending more time doing administrative paperwork for those types of items but you are also spending time educating your staff and your employees and looking at different ways to structure healthcare. • I agree. We are actually doing something now with the insurance guys, where we are lasering certain people out, meaning our company is just covering them because they are very expensive. Part of it so we can keep the rest of the group in a reasonable way. As you do those kinds of things you keep the custom for the employees but obviously it’s a cost for the company itself. To do that you are covering it entirely when you’re doing that kind of a thing. I would say the argument is that it is getting to be very costly, what you need to know on a day to day basis about healthcare and what you can and can’t do with individuals. Well, it wasn’t there before. Those are some of the things happening with it, I think it’s at least weekly that we see another article on healthcare related things and I send it over to our healthcare people. How does this affect us, can we do stuff and I figure out what the heck this could mean really. It is a major concern. • We have employees who get a reasonable raise and then they’re very upset with us because the healthcare will be more than their raise. They don’t understand that, bottom line, their check is smaller than it was last year. Those are things that are concerning. That the general employee does not understand the complexity of one dollar on all days. • There is a lot of education to educate the employees, but I concur with your employees because it’s so hard for us as employers to understand that to let alone explain it to your employees. It’s a whole other battle to overcome, so it’s very difficult. • That just part of it. Your employees feel like you are hiding things. It’s complex to even explain it to them and then therefore, “You’re just making me pay a lot more,” and those kinds of things that go on and then trying to 130

keep that rapport with your employees when these things are going on it affects, there is an effect to it. • We’ve had an opposite effect but not so much from policy change and more that (company name) over the last five years has grown significantly through acquisition and so we’ve taken smaller event business units with their own smaller healthcare plans and consolidated those into a central corporate healthcare plan and that then enabled us to do more. • It’s pretty unique. • The impact on our general employees will be a little bit lower premium for the healthcare with the same level of service so you don’t hear that ever, pretty much, so it’s really big surprise that we are able to do that. • It’s a little bit different for us because we’re a little bit larger, but our premiums have held very steady and competitive over the years with minimal increases. I would say it’s definitely a concern but I don’t think it’s a huge concern from our standpoint. Another issue that seems to be coming up more, and it’s also employee related, is the development of leadership within the firm. • I think especially in Greater Minnesota it’s hard to find your leads, your managers, your supervisors in developing internal staff and that’s where our partnership with Ridgewater helps us teach our employees supervisory skills, even some of the skills related to supervising individuals from different age groups and classes and different things like that. It’s been huge to bring in soft skills training so I feel very fortunate that we’ve had that partnership because as we saw growth in those types of items we saw this lack of people who were educated enough to take up most leadership roles. Does it help in retention as well? • Very much so. When your employees see you investing capital in them by bringing these outside trainers and resources, they are much more dedicated to you, because you’re taking someone who maybe never saw the fact that they could be a manager or a supervisor. You’re saying, “Hey, you know I know you are not in that role yet, but let’s bring you on board, let’s get you into these trainings and see what happens.” Not that there is a guarantee that we are going to move them into that position, but you are giving the training and the skill before they move into that position versus almost throwing them to the wolves by throwing someone who has no leadership training or skills in there. 131

• I’ve discovered over the past six months we’ve found that training comes up more than anything else, both in terms of technical skills, as well as soft skills, first hand supervising. • I think we are recognizing the fact that you’ve got a lot of people who were maybe shift workers and are now growing into supervisory levels as the baby bloomers are starting to retire. I think it’s a demographic shift whereas some of the people who were in a position longer are starting to leave employment and instead of trying to bring in somebody from the outside, companies are moving people up from the inside.

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Merrifield February 29, 2016

Clow Stamping Co.

Where are you with regard to the skills gap? • Still exists. For us, we’ve been looking for a laser operator, as an example. We’re training from within. It’s the best option at this point. We don’t have enough of them coming out of the schools to keep up with the supply. Are you finding enough people even to train from within? • We have enough people. We don’t necessarily have enough people who are qualified enough, or have the ability or desire to learn to that point. We’ve had a couple of guys step in and try it, and they didn’t make it. They went back out to the floor and said, “Okay. We tried that. That was nice. I don’t think that’s for me.” • We’re not hiring right now, but the last time we looked for welders, there was nothing available. We got two or three applicants. Luckily, we get a lot of referrals from within. We get a lot of personal referrals: “My brother,” “my cousin,” “my uncle is looking.” That’s where we get most of our welders from. We’re still struggling just to find basic labor for the shop. At (company) we’ve decided to automate the end of the lines because, Sponsor: Clow Stamping Co.

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number one, you can’t find the people, and, number two, you can’t keep them. They’re pretty routine, mundane jobs. • I would echo that. I will be looking for ten skilled trades folks here in the immediate future, and half of them are going to be the machinist/ welder types; and the other half are going to be electrical-mechanical technicians. I’m nervous. I’m going to attend job fairs down at Dunwoody and St. Paul Technical College here in the next month. I haven’t seen the students coming out of CLC (Central Lakes College) like we did at one point in time, so we’re kind of expanding our reach as far as the schools are concerned. • I just had a tour come through on Friday. We had about 22 kids come through, young people, and that’s up from the last time they came through. • Numbers are down all over. It’s not just up here, but some of the schools seem to do better than others. Alexandria still has a pretty good number, but, boy, they have competition for the people, and they’ve got enough work right in their area. Some experts think it has less to do with training than demographics. There just aren’t enough kids to reach. • It’s forced us all to do things differently. We used to be able to go to a school and find the people you needed. Well, the people in this room are putting effort into high schools and even junior highs to get students interested in manufacturing. • Yeah, the good news is when you need a CAD technician or an engineer, at least to run a line, you need fewer of them than you need for direct labor, so … • Of the 11 welders that we have, I think six of them came out of CLC welding program, so I’m pretty much excited about that. I gave a talk a couple years ago at Pine River Backus High School, and what I tried to explain to the students there is that if you pick a trade, whether it’s electrical, plumbing, welders, or whatever … I said, “All you have to do is do the best you can.” I said, “Basically, I started out in construction. From construction, I went to my own business. From my own business, I bought a liquor store. I went back into manufacturing. It’s one of those things. If you can excel in what you’re doing,” is what I’m trying to explain to them, “You may be a welder, but if you want to take that extra step … you can start welding in your garage and build a business. This is where you want to go. You want to keep succeeding when you’re in there.” 134

• I think we may have a slight problem, because you have to look at government a little bit, too. Government likes to give things away, and today they’re giving a lot of things away. I think what we’re fighting with the free stuff as opposed to working for it. I have a couple of grandkids. I know how their feelings are, and it’s shocking, because I was always a worker bee. • I remember being a child back when the days of “ready or not, here they come.” What we were looking for was the kids who got out of high school, went to college, didn’t work, didn’t work out, took two semesters a year, said, “College isn’t for me,” and now they don’t have a skill. Where do they go? We’re looking for that lost group. • Not that 25 percent that already knows they’re going to be on the fouryear track, but the other 70 percent that needs direction. For us, if you can hire a farm kid, you got it made, because they know how things work. • Absolutely. • They know how to work. • So many kids now are raised with iPhones, computers and in front of TVs. I’m not saying that’s all bad, but it’s not very hands-on mechanically inclined, for the most part, unless we start changing programming to involve those skills and what they see and use on their equipment. • The farm kid’s got to be a diminishing prospect, though, right? • I think we tapped that pool about 30 years ago. • There’re still a few out there. • There are still scrappers who know how to change a tire on their bike. • A lot of kids don’t even know how to do that kind of stuff anymore. • Don’t know what a sick day is. • I think that goes back to the fact that you used to have tech ed in junior high, and you just don’t have that opportunity to get it if you’re not getting it at school. I think if there was a way that you could work that back into the schools.

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• Shop class is an elective. As expensive as it may be, it’s got to be back in the schools at a younger age. • One thing in our favor may be student debt. Kids are going to get a lot wiser and say, “Man, if I go to college, it’s going to cost me $80,000.” • It depends on who you elect. • Yeah, they’re going to make it free. • It’s all free, right? • Assuming that it’ll continue for people to culturally stop avoiding that, • And maybe go to a tech school and get a one-year diploma and come out with $5,000 in debt instead. • And a job. • Yeah, a job, right. • You’re right. It depends who we elect, so… • I think it goes back quite a ways … that the stigma of manufacturing was so dirty, dark and dangerous. • The counselors were not encouraging kids at all to go in that direction, right? At church the other day, there was a guy that I just got reacquainted with. Turns out he was my graphics arts teacher in 1969, in Bloomington, and we got talking about the school back then and now. He says at the time he was teaching there were 12 shop teachers. Now there’s one, and they have trouble filling that class. That’s the skills gap, but what about even entry level people. Are you having trouble finding and keeping them as well? • It’s out there. It’s prevalent. • The work ethic is what we look for. We have to learn how to train them ourselves. • We’ve got training needs assessments and requirements for the departments, and so they bring them in and see what they can do. We’ve got testing that we use to see their standard or level of math and recognition 136

of equipment and tools and then go from there. • Being a lot smaller, only 85 employees, we don’t have the resources to do things like that. Soft skills are referral. Like I said, “my uncle,” “my brother,” “my cousin” I’ve had people say, “I would not recommend my cousin to come to work here, because he can’t get out of bed,” so we use a lot of that. • I would echo that as well. We get probably the vast majority of our employees through employee referral, because they know what it takes, and they know who they want to work next to—and who they don’t want to work next to. • We get quite a few names through referral. It’s a financial incentive, so I think they’re looking at the financial incentive as much as whether or not they think they’re going to work next to the guy. • We use a temp service for the first 30 days to see if it’s going to be a blendable match, so that’s nice. When we lose them in that first 30 days, it’s not our unemployment; it’s theirs. Our turnover is about 20 percent. What kind of success do you have through the temp agencies? Do you get pretty good people? • We tried it and didn’t have much luck. • They know us well enough. We’re a big enough account. We get a lot of what they consider as work-ready. • You’re getting all the good ones first, huh? • We pay pretty well, and there are those incentives. I think we have 12 starting this week, right? • We bumped our second and third shift wages 50 cents apiece, and now we’ve had people that were up for moving to the first shift. • That want to stay? • They decided to stay where they were because of the money, so that’s great. Now I can hire for all three shifts. It’s been probably 25, 30 years since I’ve been able to do that. • Training’s been good. For two years now, we’ve had one person full137

time just as our employee development person. And we just got a $100,000 grant for an apprenticeship program that we’ve put in place; and that we’re actually hiring specifically for, in some cases, from within. It was actually part of a federal deal. State-administered, I believe. That’s to pay the wages for the trainer, plus it’s accredited. We have other training programs we use for existing and a development path, and a lot of online training, but this one is skills training. They’re out there, you know, Basic Machining 101: how we drill a hole and measure it with a caliper and a scribe and a hole within five thousandths of the edge or something, or whatever. It’s some real basic stuff. • And unemployment is low enough, it’s hard to hire good people. The pot is smaller. • If we’re looking to get everybody trained who can be trained, then we need to look more at accuracy with the pool of people that we’ve got to work with. • Yeah. I can’t remember what the term for that is, the “people not in the labor market,” or something like that. Let’s switch topics a little bit. Last year when we did this poll, 89 percent of the manufacturers that we talked to said they were very optimistic about the economic prospects of their firms, which is a very large number. How many here were in that group—and how did it work out for you? • I think so. • Definitely. • Yeah, we’re pretty optimistic. We finished our fiscal year October 2015. We’re down, I think, four to five percent from the previous year; but the previous year was a record for us, so we weren’t that far off. This year, we started off forecasting a 10 percent increase. We just adjusted that downward to probably a four percent increase. • Within the last four to five weeks, we’ve seen our backlog jump seven, eight percent; and we’ve seen the release of several new projects with multiple customers. So, we’ve gotten probably $250,000 in new tooling orders within the last three weeks, and it had been slow for a year and a half.

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What do you attribute that to? • I don’t know. I think it was lack of confidence from our customers. I think they were just kind of in a wait-and-see mode. I don’t know. It’s hard to read those guys, but we had been bidding on sizable projects throughout. Nobody was getting work. • Not lacking confidence in us. • No, in the economy. • This year looks very good. Last year was a flat year, pretty much. Started off slow and then came back. • Last year this time, we were real optimistic, yeah. It was about the year when the bottom dropped off for a couple of months, but, yeah. Just the last month, I’ve been traveling quite a bit in California and Texas, visiting customers. I can’t think of an industry that’s really down right now that we’re in. They’re all either strong as last year, or figuring the same as last year, or most of them are way up. One I went to last week is a large company in the firearms industry, and they expect to double this year, and they’re already a big company. • Agriculture is still way down. • We’re in ag. That part of our business dropped dramatically last year, but luckily, we had enough new customers, so last year was flat. We’ve focused on getting new customers in the recreational marine and outdoor products and things like that. • Yeah, last year was a pretty good year, but anything was better than three years of recession that we had. Those were really nasty, ugly times in banking and with all of our customers; but it seems to be getting better and better. • Last year, we were up about 14 percent over what we were in 2014. Everyone tries to be optimistic, and if you’re optimistic, I think good things happen to you. We opened up the South American market. We have a distributor over there now, and South America’s grown pretty big for us. As far as clearance goes, we only have 29 different pieces of equipment, but they’re all related to rotary cutters. We try and focus ourselves as a leader. Let’s just say you’re number one. Who’s going to knock you off the perch? No one’s going to knock you off the perch, and so we’ve been fortunate. We have some good OEMs, and we’ve done a lot with our website. We 139

cleaned it up a bit. It’s more professional, and we’ve gone on You Tube, on Facebook. We have a sales coordinator who’s taken care of that. I think that all helps, because we’re getting probably twice as many hits on our website as we had last year, and that’s all good. And resulting sales? • Right, and it’s from individual people. We get the individuals. Then we get the dealers. Then we get the distributors, and we get the foreign countries, so that’s been working well for us. I always found out, though, from being in manufacturing from the late ‘90s, that every time there’s an election year, it’s kind of slow that year because no one knows what’s going to happen. • The uncertainty, yeah. • Everyone’s hoping that everything’s going to happen for good reasons, but you just never know what’s going to happen. This year, it looks strong right now, and it may fall away. I really don’t know, but like I say, election years are kind of tricky years. • We kind of measure our success by the number of machines out the door, and we’ve doubled our number since 2013. A lot of that is due to the recession. Everybody held back on capital equipment additions during that time, and so they’re kind of playing catch-up, but a lot of our business has been international. Prior to the recession, probably the majority of our business was domestic, so we were dealing with the large soft drink and beer companies, and, unfortunately, that business is on a downhill slide. The international and the craft brew beer is really where our market is getting saved. But, yeah, we’re double our number since 2013, so it’s been really good; and it appears it’s going to stay that way for the foreseeable future. We first did the State of Manufacturing® in 2008-2009, not a particularly good time for the economy or for manufacturers. The downturn came as such a surprise. Were there lessons in that situation that carry over into how you now manager your business? • Yes. We decided to reduce our debt. We had a lot of growth, too, right after that and we reduced our debt from I don’t know six or seven million dollars down to a million and a half now, and it’s going to be zero before you know it. If we go through another recession, I won’t have that hanging over me. That’s a hard lesson that I learned. • You keep diversified? 140

• Yeah. We’re always looking for a diverse customer base, and we’ve added a couple new ones: air conditioning and refrigeration and lighting. • If 80 percent was in ag, we’d be in trouble. • Two years ago, John Deere was probably 35 percent of my business. Now today, it’s about 17, so I’m better off. • That’s what we had, too. • I’m comfortable with that. I recognize they were too large anyway, but it’s hard to turn down work. • That’s the same thing we did, too. We diversified and hired a new president of sales a couple of years ago, and his goal was to diversify. Our biggest customer was 60 percent of our business, and they were tied to ag almost exclusively, with John Deere. That business is now, like, 20 percent of our business, and the others are going up from there. We’ll never be to the point we’re beholden to them for 60 percent of our business, because we’re actually looking to diversify out of the mold making into engineering and design. We’ll take your product right from conception to the product. In the 2009 focus groups I heard many manufacturers say that “recession’s a terrible thing to waste,” meaning that they were looking for opportunities. Do you think you’re well-positioned now in case that happens? • A few competitors have dropped off. Probably going to pick up some work that they were doing, but I don’t know. It’s hard to read. • Typically, competition gets pretty tight during a recession, too. • Everybody starts price shopping. • Everybody. • Right. Let’s talk about some other issues. How about supply chain relationships? It seems that OEMs got more demanding during the downturn and were more interested in price and terms. True? • It’s gotten worse. They have a lot of leverage. This afternoon, I’m going for my annual (OEM) meeting.

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• Did you say “meeting” or “beating?” • They do like the leverage and the bigger they get, the bigger their stick is; but I think I’m in pretty good shape at (company). My price is very good. My on-time delivery is over 99 percent. I’ve offered them some price reduction over the past year, probably not to the level that they’d like me to be at, but we’re going to go down there and spend an hour and a half with them. I think it’ll be a good meeting, but they’ll beat us up. • They know your pricing very well. They know how much you’re paying for material, how much you’re paying for labor, how far your product has to travel. They know all that stuff. • Surveys, customer surveys. • Yeah, and (company) comes in twice a year just to let you know how you’re doing. • As a mold maker, for us, price is important, but lead time is even more so. All of a sudden, they’ll release it, and you’ve been working on it with a ten-week lead time half a year. Then all of a sudden, they’ll say, “We need it in four weeks, and we can’t have anything but.” So, we have to jump through hoops. For a mold maker, lead time is king. • That’s hard to shave. Our lead time never gets bigger. Even when we get busy, we maintain our lead time, because we know that’s just a given. They won’t accept six weeks on a lead time where they’ve been getting it for four. They just won’t do that. • Our average lead time has dropped from eight weeks to four weeks in the last five years. Just got to shave, shave, shave everywhere you can. We’re looking to go more. • We’ve also adjusted our sales commission, because we work with independent reps. Ten years ago, it was pretty much five percent for everything. Now it’s anywhere from two percent to four percent to five percent, because they understand that our customers have this pricing issue with all their suppliers. For me to pass on price reduction, they need to feel some of the heat themselves, so they’ve been feeling it. • Same thing. The big thing is, customers don’t want inventory anymore, and they don’t want to blanket-order, and they don’t want to commitmentorder. You’ve got to come up with new faster ways or risk them putting 142

material in process earlier than you have a commitment for it. They are willing to do some cost guarantees of inventory as long as we follow parameters, but we’ve got to set the parameters and see if we can get them to agree to them. That’s probably been our biggest challenge. We do have parts that we’d love to say we could always deliver in four weeks, but it takes longer than that just to get the material. If they aren’t going to commit to the material, we can’t order it ahead of time. What we have done: we’ve lowered our inventory. We used to carry a lot of inventory as far as products already made, that type of inventory. • I think it’s important to get your product out on time. Our ship-to dates are almost right spot on. I think our redos have almost been eliminated because of the process that we go through now. Everyone is inspecting what the next guy had done in front of them. We want to get everything done before it gets into product coding, because that’s where you have a problem. You got a do redo at that point, it’s no good, so our inspection points have picked up a little bit. • Yeah, we got a little bit leaner. We got a little bit meaner. We got a little bit faster. We don’t have the weakest product out there, but we try and put the best out, and that what we’re seeing. We’re number one, and our biggest competitor right now, one of the OEMs, is testing it, and the first 15 hours, it fell apart. Ours is still going strong. We give a longer warranty, so it just makes a big difference. We’re trying to be more customer-orientated, whether it be OEMs, or whether it be dealers, or distributors. We got away from a lot of distributors, because what’s been happening is that you get a lot of online companies. Let’s talk about foreign competition. • I heard from (company) within the last two weeks that the pricing from their domestic metal stampers is as competitive as it has been from China. I think China’s pricing has gone up, and we’ve probably gotten a little leaner, so there’s not much of a gap anymore. Just about all of our exporting is done for U.S.-owned companies that export. I’d say it’s probably less than one percent of our total sales, so we’re not actively looking to export. I think the only sales rep we have outside of the United States is in Winnipeg. • Yeah, our customers export, obviously, and that’s where some of our increased business is coming from now. A company I visited last week and just signed on and got the rights to China for their dental product. They’re expecting huge numbers so, yeah, it’s helping us out. We ship some parts to France, but it’s because we have a relationship with their American 143

affiliate. Otherwise, we wouldn’t be doing much. Same thing with Mexico. • Yeah, and India. • A little bit, but it’s all through American affiliates. • We do a lot of international business, but the drivers are a little bit different. There’s probably less competition for the machines, and our machines are also tied to the carton sales for graphic packaging. Again, it’s not necessarily price that’s driving our machinery placements. There’re a lot of other factors that come into play to that. Fortunately, the quality of our machine right now is really a world leader, so we’re enjoying that spot and trying to figure out how to hang on to it; but, again, like I said, it’s different factors. It’s not price that’s driving our machinery placements. How is the cost of providing health insurance to employees been as a factor as a challenge for driving your business? • It’s always changing. We’re always looking at a way to lower our costs. We’re not self-insured. We’re not big enough, so we look for some creative methods. We just renewed, and we got a price decrease, slight. • Don’t hear that much. • We went to a higher-deductible health plan, and then we stacked an HRA on top of that, which the company then assumes that risk between a certain point and the HDHP, the high-deductible health plan; but we’re willing to take that risk in order to save dollars. It was a good plan. It was pretty creative, but it’s a challenge. Had we stayed where we were, we would’ve gotten, like, a 30 percent increase. That’s just unacceptable. • We’re self-insured. High-deductible health plan. Keep it pretty low, the minimum you can do for that for the employees. Actually, I think our usage per person went down slightly, so that kind of tells me when it’s their dollar after they get to the deductible, they’re still not sure when that kicks in. They’re getting smarter about usage. The Obama plan, that everybody has to have medical, has more people on it. As a whole, it’s costing us more, but we’ve got more employees. It’s a huge chunk. Benefits are over eight bucks an hour. A good chunk of that is medical. Do you get the sense that it’s going in the right direction? • Medical? No way. • I think it’s going in the right direction that the employees are aware now 144

of what it costs. We just went to an HSA a couple years ago, and I think that’s helped a lot. Is the cost going in the right direction? No, but I think utilization where people understand their own responsibilities. Now I look before I go buy a prescription drug, because I know I can shop three places with the HSA. I know I can go here and save two bucks, or three bucks. • I don’t feel like people shop, though, for major surgery. • People still don’t understand that they’re responsible for their health. What we’ve got to do, I think, as employers is show them the way that they need to go. Things like that where a person actually participates in it and figures out how they should eat healthy and exercise and all that kind of stuff. It all adds up to our cost as far as an employer is concerned, what it’s going to cost us in the future; because if they don’t take care of themselves when it’s relatively easy to take care of themselves, we got a big bill coming 20 years down the road. • Unfortunately, we’ve got some of that. Last year, we had a few of those bills that came to roost in our company, and we’re paying for them. Three good years in a row, and then last year was … whoo. Kaboom. I guess the fortunate part there is if we do better in this year and next year, we are going to see a benefit from that versus being in a conventional plan, we would’ve just seen our rates continue to go right straight through the roof. • You mentioned earlier on that whole entitlement thing, and getting people to be accountable for themselves is just such a huge societal thing. I agree. If we can get people to start taking that responsibility and recognizing that it’s not just your family genes; it’s how you live your life every day that’s really driving how much health insurance you need in many cases. Not in all, but in a lot. Yeah. It’s 40 percent of somebody’s salary, we figure, for the benefits package. • It’s a huge, huge cost. Are you feeling pressure to keep the starting wage up? • I think so. • Yeah. • Raise it. • We want to hog the best guys. We want to keep hogging the best workers. 145

• Two and a half bucks in the last five, six years? • We have a non-compete amongst the four of us, an unofficial noncompete. • We do have friendly banter among ourselves. • We are all vying for that small pool of people. • We have different departments. Our welders pretty much start at 14 bucks an hour with no experience. • We start ours at $15. • If you come in with a year’s experience, I’ll start you at $16, $17, $18 an hour. You’re machining, if you come out of trade school just raw, I’ll start you at 18 bucks an hour. If you work on our second shift, I’ll give you damn near $20. • That’s pretty high. • We’re a little below that, too, but we don’t have as many machinists as you. We have, you know, a dozen. • Our machining is very unique. It’s all 3D. We’re working on molds, so it’s a very complicated type of machining. It’s not just shafts and pins and stuff, flats. Very intricate setups and things on molds. • Yeah, we’re fortunate. Nine out of 10 applicants don’t need any experience. We’ll train them to be a punch press operator or whatever. Every once in a while, you need a laser operator, or a tool and die maker. • I’m glad I’m not in your business. • Laser machining and welding are difficult.

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FOCUS GROUPS

Alexandria March 1, 2016

Alexandria Technical & Community College

In last year’s poll an amazing 89 percent of respondents said they were very optimistic about the financial prospects for their companies going into 2015. Were you among them? How did it work out? • Good year, very good year. • We’re a job shop, so we’re covering multiple markets and every market that we touched last year was strong actually, surprisingly strong. • We had a good year. The year before was a record year and last year started out better than that, but customer tooling orders really dried up the last five months of our fiscal year. It ended up a very good year, but it wasn’t great. What happened? • It’s typically a capital investment for them to tool up for new product lines; a lot of times it’s a bit of a leading indicator of slowing down. For some reason, there was a lot less investment with our industrial OEM customer base in new tooling than there had been for the prior, say, 24 months. It’s often across the board to sell a lot less tooling activity. A lot of Sponsors: Alexandria Technical & Community College, Alexandria Area Economic Development Commission, Alexandria Lakes Area Chamber of Commerce 147

times when that happens you see a decline in your manufacturing orders too, which we have. We saw a little bit of that last August and September, and then it came back and now starting in late January, a slow down again. The last five weeks we’ve seen our backlog shrink. • We had a good backlog heading into 2015 and it turned out to be an outstanding year for us. We’ve seen some of the same things at the end of the year, so our backlog has dropped a little bit. We’re not quite as bullish on 2016 as we were on 2015. Would you be an “89 percenter” this year? • We wouldn’t be. • No. • Not that high. • Our backlog went down quite a bit from where it was going into 2015. • We serve a lot of markets with our equipment. It seemed like it was mostly just a scream around a bunch of different market segments that didn’t seem to matter that much. Ag carried us a lot because of the ag industry being down, and energy also, and we had a fair amount of business in Canada and that dried up with the strong US dollar. Those are the three big areas that seemed to hurt in the second half of the year. • We’re more optimistic; we were pretty flat last year. We actually had some good new business but we’ve made significant investment in sales, new capabilities but we had significant attrition. We would have had great growth except for ag. This year we’re planning on 20 percent growth, but for right now we’re on a little below forecast but it’s looking better. • We’re very nichey; we’re advanced optics and infrared components. A lot of it is defense. There’s been a little bit more activity in defense, I think we’re seeing, but yeah, we’re very niche. We’re a microcosm industry because of just the specialized custom stuff we do. • We had pretty high growth in 2015. Backlog dimmed down towards the end of the year and in the first quarter, but the rest of the year is looking very strong. Ag is down significantly, but our other industries are real. Equipment in the airline industry is doing quite well and also the parcel delivery industry fueled by e-commerce.

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• Last year turned out as we expected it to, maybe a bit softer than what we had hoped it would be. We’re in the wood industry making cabinet doors, all the interior woods, cabinets, and things for building, for architecture. This year we’re anticipating a very strong year. We’ve got a lot of projects and I would agree that the ag industry, being that it was so soft, affected our business quite a bit because people just weren’t buying. Originally it was thought to be a much stronger year at the beginning but then it’s softened in the middle of the year and the end of the year we started getting busier again. Now I’m hiring again, bringing on more people, so we’re forecasting this year to be much stronger year than it was last year. Anyone worried about softness in the economy this year? • I am. You see volatility in the stock market; that has to indicate something. I don’t know that they necessarily correlate. • Right, the stock market chaos. I don’t know what it indicates. It’s up 300 points one day and down 250 the next, it’s the same planet. We have a large customer going through layoffs and cost cutting and all that. It started for them last May, where they really started to feel it. Farmers, if they have money they spend, if they don’t have money they don’t spend it. • I have a friend who is a larger electrical contractor, construction and service and technology. He’s talking about the impact that slowing down on the Iron Range has had on electrical contracting and service. I asked ... it’s funny because if you went November of 2014, things were booming on the Iron Range and six months later they were laying people off. • You hear about people dumping steel but they are really not dumping steel, it’s a function of when fuel prices are so low it’s a lot easier to ship, economically, to ship steel from other places and when the dollar is really strong you get the advantage if you are an importer. It’s not so much dumping; it’s just the economics; low fuel and a strong dollar favors overseas steel. • He said one thing that really affects the steel industry is the decline in gas and oil prices and the slowing down places, like in North Dakota aren’t drilling, because he said their big customers are steel. You start seeing how some of this stuff is connected and it has a ripple effect. I think there are some significant industries that are really stubborn. They are going to have a ripple effect that you don’t really appreciate at the starting line of looking at the economic picture.

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Did the experience of 2008-09 cause you to change the way you run your companies? • We’ve cut a lot of cost in purchasing. We’ve really put a lot of pressure on our major suppliers of consumables in manufacturing to give us better deals, and they’ve given us better deals. We’ve cut significant costs. There’s still plenty of low hanging fruit in cost cutting. • We have to be smarter. We had to learn those lessons, in how to work together. We certainly watch our dollars, and we look at everything coming in. We watch our inventories and then watch our yields and try to eliminate the mistakes whose costs can ripple through the factory. Three years ago when I first started with the company we didn’t pay attention to the flow through the factory. Now, that is key for us. We only manufacture what we can only actually build. • We call them unforced errors, that’s when you create scrap, you have quality issues or damage to equipment ... it just comes right off the bottom line. We’re driving to eliminate those and increase the value added per employer measure of productivity. Another thing is automation. Our facility has a lot more automation than it had 10 years ago. That’s created real opportunities for people to gain skills and use higher skills and more interesting and varied to utilize the robotics and the automation on manufacturing floor as opposed to operating machines, and so that also increases your productivity. If you can grow without proportionally adding people then you will set yourself up well. I think that we have a stark difference on our balance sheet from 2008. When we went into the great recession it was really bad timing for us because we had done some re-capitalization and had taken up new debt and all of a sudden sales went down 30 percent. • One thing we have not done since 2008 is taken any new debt. Another thing we’ve done is paid things off. We are almost debt free now; back then when we were going into the great recession we had seven million dollars of debt. What about the skills gap? Is that still a significant challenge? • Yes and no. We have two corporate trainers on staff, and so that helps us because we can bring in the unskilled labor and create skilled labor, but it’s still a challenge. I don’t think that’s going to change. • We have an initiative within the factory to automate 50 percent of our CNC work centers by the end of 2016. We are driving hard towards that automated work center. The purpose is not to eliminate jobs, but it will 150

probably change our workforce in skill sets; it will also change the pay structure. We are probably paying higher wages to a smaller group of people, but we do have a focused initiative to automate. • It doesn’t necessarily mean that there are fewer people, it just means that you might grow, with that strategy, you might be able to grow 25 percent on your top line over a period of time and not add people or add two percent to the workforce so your business becomes less dependent on hiring proportional to your growth, which I think companies have to be doing. Some experts are now saying the skills gap is less due to training opportunities than demographics. There are simply fewer people out there chasing more and more jobs. What do you think? • Just drive along the freeway and look at all the boarded up firms and consolidation. People aren’t here and we are recruiting against other industries, we are not just recruiting against manufacturers. Walmart wants to hire 400 people for the new warehouse in Mankato. I like what (name) was saying, automation energizes people because it actually may help them step up and get a new opportunity and a new career. That’s really energizing. • That is absolutely what we are seeing. We are having no problem taking in the students that we do and putting them out there. Our students are having multiple job offers five, six months out of graduation. We don’t have any problem putting people through programs, getting them jobs and getting them out there. • We are seeing the pipeline problem just like everybody else, because with those declining populations, and significant declining populations in a lot of our regional high schools, that means the pipeline even for us to go out and recruit. We have to recruit just like everybody else does, and so recruiting people into a lot of our programs in the college is getting to be more and more of a struggle because the babies just aren’t being born. They are just not there, and so that impacts us as well. Does it put a greater priority on internal training and leadership development? • We just started a fourth tier of training internally. I would call it leadership essentials, so we are talking not only about the technical skills. We had a 20 percent employee growth just this year and most of it occurred in one department. It’s been a challenge for us because we have people who have been there three weeks trying to train somebody who just walked 151

in the door, so we are trying to be more reactive. • We are getting more and more people out of retail. • It’s funny you say that, because I was thinking about how robotics is going to impact a place like McDonalds. I just think a real hotbed for seeing a lot of automation, because it isn’t like you are getting filet mignon, there’s a lot of craftsmanship in it. It’s a process. • Our corporate trainer went to work on the press for a week and was having some challenges with one of the pieces of equipment. There was a fairly new employee, a young lady, who was trying to help him. The difference was, she was a gamer. She was easily working the controls and stuff; she could just make it dance out there. • It’s intuitive. • We are seeing a lot more women in the workforce. • Our workforce has been 50 percent women for 27 years. It’s not a new thing to us. What about the availability of the entry-level workforce? And do you still experience soft skills challenges? • I think it’s more about relationships, teaching people how to communicate and get along and play nice, be collaborative, more than get to work on time. • Its cultural, you build a culture within the business and they follow suit. • We will take a chance on somebody. If somebody seems to demonstrate the raw, bare essentials that you are talking about, if they want to invest themselves in learning the job, we will bring them in even if they have had no experience in manufacturing, no experience in wood. I say, “I can teach you how to be successful in this business, but you have to be here in order for me to do it.” • We are seeing some great opportunities there that we are able to develop in our people and grow a great team. We have some initial churn but I think we end up getting an opportunity to bring some people in we never would have hired otherwise. • I am actually having a lot of success with second-career people, those 152

folks who have retired. I hired a teacher to put together closet packs and he absolutely loves it; he thinks it’s Tetris. Would I have thought that a teacher would be successful in a manufacturing world? I really didn’t know, but we took a chance and its really working out well. • We’ve had a number of people who are coming back to small towns and who are retiring there; they don’t want to quit work. We have one guy who wanted to work three days a week because he wanted to spend time with his grandkids, so we do that. The workforce is really changing who we have in the workforce. We’ve talked for several years about the potential impact of impending retirements. Has there been an impact? • I look at our company, and we are really a two hump camel. We’ve got the people who are very senior who have been with the company a long time, but we don’t have a whole lot of people in that category. Then we have the two-year people, three-year people, four-year people. We keep people on as long as they want to work. I’ve got a couple of people who are well over 70 and who are still working for us. Let’s change the subject. How do you feel about competition from foreign sources these days? • It’s impacted our business in 2015 for sure. Primarily Canada, but we sell in other countries as well, but Canada is the most significant. • I don’t know if it’s hurt us in my case, but we buy $50,000 worth of glass from a small company in Germany. The euro has benefited me in that regard. I’m a little too small to know internationally how it’s impacted us, but we are still shipping parts. We still have our accounts in Germany and China that we still ship to. They may have been down a little bit, but they are coming back this year, so I don’t know what that means. I don’t think it’s hurt us; it’s helping from a raw materials side. Another legacy of 2008 may have been how supply chain of the OEM types became more demanding in their relationships with suppliers. At the time some folks said that would be temporary. Was it? • That was an awfully hopeful person. • We don’t have a great deal of OEM business on our side, but we sell through a dealer network. They’re forced because it happens with their OEMs. But the dealers, five or six years ago, they would stock, they don’t stock anything any more, so that has progressively hurt. They basically have retail sales, so once they sell it, then they’ll buy it and just have it 153

delivered to a customer. • The way we do business is now a way of life. I think we’ve just settled in, and that’s just the way it is. I don’t think it’s changing. • Yeah, I see supplier agreements that we get that used to be eight pages long and then they became 12 pages and then they became 18. Now I’m seeing some that are 20, 21, 22 pages. They get longer. Legally they get harder to understand. They’re more punitive. They’re more one-sided. Fine print. It’s interesting. Sometimes there are customers we’ve been doing business with for a very long time without any agreement and all of a sudden, “We want an agreement, we think that will help the relationship.” You start looking at the agreement, and it’s like being married to someone for 25 years and then they offer you a pre-nup. This can’t be a pre-nup. Another issue: What about the cost of providing health insurance for employees. It is changing? For the better? Is it worse? • Our tagline is “demand innovation” and I like to tell the boys that we demand innovation in all practices, and we just signed a contract, we’re going to open our own clinic. We have friends who are just step in step with us. Just for our own employees and their dependents in an effort to address some of those growing costs. When you take a look at pharmacy costs, lab costs, and just the cost of an office visit. For one procedure, we can go to the local clinic and pay $200 or we can have our own clinic and pay about $89. Right in your shop? Right in your building? • About a block away. It is a contracted service. All of the costs will belong to us with the exception of staff. Staff will be supplied by our partner. • That’s really intriguing. There’s another business down in the southeast that’s opening up a daycare center to attract and keep employees. You talk about government regulations, he’s found out. That’s what he has to do to compete down there. It is sort of the same idea as a clinic. • At what point do you reach critical mass to be able to provide your own clinic? Is it about the same threshold as being able to self-insure? • For us, I think it was really culture-based for a long time. We’ve had a wellness program for nine years, and we very clearly understand what our risks. As an organization and certainly as individuals, then it’s all about case management and how do you prevent that heart attack or that 154

stroke or that lifestyle choice? For us, it’s just almost an extension of our wellness program to keep people healthier from the very beginning instead of treating disease. It’s all about just getting the people there. It’s all about utilization. • You take a look at where you’re spending your dollars. Again, it’s all about utilization of your plan, where you’re spending those dollars, and where you think you can save them so that you can continue to provide the care that you want to provide for your families and not cost them or the company more dollars than it already does. Is there a sense that the health insurance markets are reaching a certain stability now for planning purposes? • We’re self-insured as well, so the markets are there to support it. Our own utilization is our worst enemy. The biggest driver is whether we’re healthy or not. We’ve been healthy up until this last fall, and we had a big surge in unhealthy population in our group. I’m talking corporate-wide now, but when you’ve got 57 percent of your dollars are spent by just a handful of people, then know that you have to be proactive, you’ve got to get them healthy, and keep them healthy. Culturally, do you have the sense that employees have a better understanding of how expensive health insurance is? Do they take it for granted? • We’ve been pretty strategic for 15 years about creating savvy healthcare consumers and helping them understand where those costs come from. • From our perspective, we’re smaller, and we’re just over the 50 employee cliff now, so it’s had an impact. We’ve had no choice but to raise our deductibles within our legal limits. What it impacts is the case of the single mother who works for us who is making not a machinist’s wage but lower than that, and she has a high deductible, and has a son who gets sick. We’ve encouraged her to apply for benefits through social services, and she says that they won’t help her. It’s almost a tragedy that the person we would help, that the society and the social services would be helping someone who’s working, and trying to help them out with costs, has been impacted so hard because of these laws. Let’s talk about government regulation as a potential impediment to profitability. Is it? • It’s not getting better. And there’s no impetus to make it so. You pass multi-thousand page bills that nobody has read. It’s just a mess.

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• It just becomes where you’re spending a lot of non-value added time doing this, and in the end, the documentation, it really isn’t that definitive. • It doesn’t prove anything. • That’s right. That’s just one example, but even with the new healthcare laws, you put out the 1099 and 1094Cs or whatever. It was supposed to be by the end of January. Now they moved it until March 31st, and that’s because the synapses that have to align to create the information, the whole protocol for getting that information so you can create the statement, is not fully developed. It really is a cluster. • It’s just the Affordable Care Act in itself, the record-keeping, the reporting requirements. • If you’re wrong, what happens? Fines and fees. • It’s ridiculous. It is so cumbersome. Either you have to buy systems to help you record it, or you almost have to add staff. • That’s exactly right. • It’s ridiculous, ridiculous. • No, and if you don’t dot your i’s and cross your t’s right, there are fines and fees, and they happen fast. They can get to be a lot real quick. It’s got nothing to do with the delivery of healthcare. • Now the climate change. Oh, my gosh. • Wouldn’t you want your energy to be available, affordable, and abundant? But none of that. If you’re energy-intensive, that’s a problem. That’s a cost adder. We’re doing several focus groups this year that consist entirely of students. What do you think we’ll find out? • I think one of the most interesting things is going to be the young student today. They’re changing their hours in school here in Alexandria, starting times, because the kids don’t get up that early anymore. They stay up late, so they don’t have traditional hours anymore. The manufacturing is seven to eleven, whatever the traditional hours are. The young students, some of them might like that, some of them don’t. I think we’re going to have to learn to deal with their differences, their nuances, and that is going 156

to be very hard for traditional manufacturing. Getting them to come to work on time, work standard hours. Some of them might want to work split-shifts, part-time. Some of them might want to work weekends and not work during the week. How are you going to run a traditional factory? I think that’s going to be a challenge out into the future for us. They’re engaged in electronics and the digital age. I think we’re going to have to learn how to live with that and deal with that. • (An educator) The fact is, some want to come to school earlier so they can get out earlier to go to work. But there are changes. The biggest thing that we probably see is how we recruit students. We didn’t even really publish catalogs this year. We’ve gone to Viewbooks. We have had to focus more and more on our marketing resources on social media. That’s how we’re doing it. This is how we’re doing it. Students don’t want to get emails from us anymore either. They don’t like getting print materials. Our focus in how we recruit has become much more social media-based, and that’s where we’re focusing our resources is to social media. Even when they’re students now and they’re here with us, how we communicate and connect with them, as students, is even evolving as well. It’s going to change. • We’re working now with some students from the high school on a project, and they told us that “Facebook is for my grandma.” • These are the things we use, and they start talking about stuff that you’ve maybe heard of. • Snapchat, Instagram.

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FOCUS GROUPS

Alexandria (Students) March 1, 2016

Alexandria Technical & Community College

What’s special about Alex Tech? • I think it’s because we’re surrounded by so many manufacturers clustered in this area. They’re probably driven to fill the jobs they need. • I’m not even from this area, but the opportunity is just huge in manufacturing. If you want a job you can go wherever you want in it. Why don’t more students think that way? Why is there a skills gap? • Probably just lazy and don’t want to go to school. • A lot of them aren’t interested in this stuff. They’re interested in fine arts or history. Not many of them want to work with their hands anymore. They want to either stay inside and teach or they want to do anything like that. • I think a lot of kids just don’t have the knowledge, they don’t know what the opportunity is. I know for me I didn’t know about electronics until about six months before I came here. I was always interested in robots and electronics, but I never really thought about mechatronics as a program. I had never heard anything about it. Sponsors: Alexandria Technical & Community College, Alexandria Area Economic Development Commission, Alexandria Lakes Area Chamber of Commerce 158

How did you hear about it? • I was at UND for aviation. I had a friend who was in his first year here. He told me what he was doing and that’s why I ended up here. • A lot of the teachers in high school said that four-year programs were the only way to go. But then I had an engineering teacher who said that there is a lot of money in the two-year programs and that you don’t have cost of a four-year school. A lot of the kids from my high school were not into that stuff. They had to go to a four year right away. They never really heard of the two-year side of things, so that’s why I think most of them went to four year. • Same at my high school. It was everybody goes to a four-year school. It would seem to be that way. It’s because of teachers and counselors? • That’s just what you hear. You have some people who just don’t go to college, but most of the others are off to a four-year school, universities and stuff. • Your teachers just stress that your whole life that you need to go to a four year because that’s the best education you can get. They don’t ever think about these places as much, except for our technology teachers. Obviously they stress going to these instead of a four year because you don’t know what you’re getting into before you really get to a four year. I think that this education is better in some aspects. What would a manufacturer do to make sure that manufacturing careers get some exposure in high school? • Be active in the schools. That’s what we’re getting to now with our mechatronic partnerships. Local companies sponsor it and then they contact students they would help sponsor. Then, the students and everyone else around them becomes aware of what they can really do with their education and where they can get it. • Did manufacturers visit your schools when you were deciding what to do after high school? • No. I’m not from around here. I’m from north, but when I was in high school and I was a junior we took a tour of a local machine shop. That’s what got me interested. That was really cool just to see it first hand in the work. I was blown away. 159

• We had basically the same thing. I’m from Hutchinson. They have a 3M down there. They came into the high school every once in a while and allowed kids to go in and tour their plant. There are a couple other small businesses that are machine technology. In high school we got to go in and tour businesses like that and that was really good. Hutchinson Manufacturing, too. They do a lot of cool stuff. The other one is MITGI, Midwest Industrial Tools. That’s actually what got me into this. Both of my brothers are there. One’s a foreman, one is the night manager. What they do is make medical supply equipment. The drills and then the pliers and stuff like that with the CNC machines. I thought that’d be cool to design them. What’s different about the education that you’re getting here compared to what you thought it might be? Any surprises? • The support. • Absolutely. The support. From the surrounding areas. All the companies around here. They just built a building, but they’ve been supporting us for the last ten years almost. We always see them. There’s somebody either every week or every other week there’s at least one person from a company coming into our shop talking to people and making sure that the stuff they gave us is working. • Another thing I noticed too is all our instructors were out in the field, so they know all the companies. They can help bring their knowledge and help us for further our career paths. I thought that was pretty cool. Is it harder, easier than you thought? Is it different? Are you learning different things than you thought you might learn? • I’d say it’s different because different than a four-year perspective because everything we learn we will use every day when we’re on the job. It gets you more interested and makes you pay attention, because you know you’ll have to use it. It’s not like just sitting in a lecture about something. • I went up to UND because I was going to fly planes. But you have to take two years of gen ed classes. I was writing eight-page papers every two weeks about education. I know gen ed is important, but there’s such a gap after your first two years. Your first day here you’re working on what you’re going to be doing for possibly the rest of your life. • The gen eds they make us take here feel relevant to what we’re taking. We took public speaking and technical math and technical rating, so those

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things are something that we’re going to use instead of animal physiology. The classes were required for engineering at NDSU. I know it’s an important class, but it’s animal physiology. I’ve heard that something like 40 percent of students who get accepted to technical colleges are ready to do the math they need. Is that your experience? • No. • Again, it’s Alexandria. • It depends on the pre-reqs. This year for mechatronics we changed our pre-req to a higher standard. That put a lot of kids into where they had to retake a math class. It just depends. When we all came because we’re all second year students and we never had any, none of us did, but she took more calc than I would even dream of taking because it’d just be a nightmare. • I think that just the education and where they come from too is a different thing. A lot of kids didn’t have to take any math. • In my high school, my junior and senior year consisted of all college classes. When I came to school here I didn’t have to take hardly any gen eds. • Actually, my senior year I took classes over here. I went to Alex, so the school was right across the street. I rode the bus and walked across the street. I took all my classes over here so I didn’t have to take a lot of my gen eds. A lot of my other classmates didn’t do that, so they’re having to take remedial classes and that has to do with what you decided to do in your high school and how much thinking ahead you did. You went to the new school? • I was the last graduating class of the old school. It’s way different than what the old school was because I did not have any machining. I did not know how to work a single one of the machines down in the shop. I didn’t even know what a lathe was. It’s a lot different than what it used to be. We didn’t have any metal working classes or anything. Do you go back to your high school counselors, teachers, other students, and talk to them about what an opportunity this is? • My teacher is really involved in improving their program and stuff like that. We helped start the mechatronics program down there. We’ve been 161

talking about how they should be doing their curriculum and what little changes they should make. I came through school and realized that this doesn’t help as much, but what you weren’t focusing on as much does a lot more. Are they listening to you? • Yeah, very much so. We used to do a lot of soldering on boards and stuff like that and that’s not as much of a thing anymore as it used to be. They did more training where you learn how to draw schematics and how to size resistors and size stuff like that for everything. They focus more on that and then they focus obviously on the automation part of their little programs they’ve got and their little trainers now too. The company I’m going through actually pays my tuition as I go. I come from a small community of about 200 people, so that’s just a huge opportunity. I hate to say it but our industrial arts teacher’s really poor. He doesn’t promote that it’s such a small community. We’re trying to get in there and tell kids like, “Hey, this is a big deal.” We’re trying to work something out where my boss and I can go into the school and teach metal classes, so we can teach it right. I think if they actually start hearing about it more there’ll be a lot more interest because they just don’t know. Do you have that sense too of them, from them or with them? Do you ever talk about what you’re doing here with your friends? • I do a lot, but all my friends went into ag related things. They’re more of vet techs and some want to be ag teachers. They had different interests than I did. • Not really. • Most of them want to be attorneys or work in pharmaceuticals. • A lot of us didn’t like working in the shop. We were young and wrecking our bodies. I talked to a lot of my buddies about it. Get up in the office and the drafting program’s a great way to get into the office at places. Has your experience here opened your eyes to career opportunities that you hadn’t really thought about before? • Yeah, when I first started coming here. I’m currently seeking a position in controls, so the programming side of machines and stuff. Coming here I didn’t know anything about programming or anything like that, so through my two years, my interest has changed.

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• Before I knew about mechatronics I thought you had to be some big shot at some four-year school. You’re super smart. Really going through this program and what they taught me here step-by-step is not as complicated as most people think. For some people it might be, but it’s really not as complex. • Eventually I want to start my own business. The interest in manufacturing was started with my parents owning the business. I’ve been around it for a long time and then it’s changed how I looked at a lot of different things. I’ve always been interested in how something is made, but now I can figure out on my own how it’s made without necessarily having to do as much research. Maybe I can make it myself. • I like working with my hands and always problem solving. That’s the big one. It’s very interesting to have a problem and figure it out on your own. How many people already have jobs or already know where you’re going to go? How did that process work? • A lot of us do internships around the area. I work at a manufacturing company right now and they offered me a job after school. With the understanding that you’ll stick around when you’re done with your education? • For me it’s a little bit different because I’m going on to a four-year school. Going through this program I changed my interest a little bit. Now I’m going to NDSU in the fall for electrical and biomedical engineering. After high school I originally planned on going to a four-year school, but instead I went and joined the military. Then, when I got back I had no idea what I wanted to do and so coming into this program it gave me a lot more opportunities and insights for what I could do in the manufacturing world. I don’t know. I guess it just gave me a lot more opportunities that I could go on and do something else. • I was interning at a manufacturing company here in town I got to talk to some people who are up in the offices. I thought, that seems like a job that I would want to do instead of being on the floor turning wrenches. Just seeing that kind of thing and talking to them, there was actually someone who went through the program at NDSU that got me interested in that. • I toured the place where I’m working now in the summer. I was a pretty well-known kid for being a good kid, smart kid. After they were done with the tour they told me to start Monday. They were happy that someone was 163

interested, someone young because the youngest machinist there is just turning forty, the youngest educated. There’s a humongous gap that needs to be filled or else there’s really no one. And they’re paying your tuition? • Right. What kind of obligation do you have to them when you finish? • Two years working for them after graduation. Who else has got a job now? • I work at (name of company). That is where I started working and I worked hard in the shop. They needed drafters up in the office and asked if I could come up there. They gave me a week to learn AutoCAD and I picked it up and started drafting. Then, after doing it for about a year I decided to go back school and learn some more. They’ve been working with me and my school schedule and everything. They’ve offered me a designing job and then I’m going to graduate. • I’ve been talking to a guy who works at (name of company) with their engineers. I have an interview Wednesday with a guy about their floor plan layout for designing. We’re just all first years, so that’s a huge step in the right direction. It feels like a sellers’ market for students at tech schools. A lot of manufacturers say that in the good schools all the students are hired way before they finish. Do you get a sense of wanting to take your time and find the right opportunities? • Absolutely. • We’re supposed to have an internship this summer. There are so many jobs around and there are only thirteen of us here and most of them already have jobs. You can pick and choose what job you would actually really enjoy and figure out what you want to do there. • I’m still looking. I’m from two hours south of here, so a lot of the jobs are from up here. I’d like to go home and live with parents, save up some money. There’s a little bit of a gap there. I’m thinking this week or whatever going down and just going to all the manufacturing places and ask if there any spot where they could fill in with a first year draftsman. Then, see if there is any way of maybe picking up a job long-term after school. • I have one now. I work at a local company and our instructor’s very 164

good at getting the students he feels are ready for an industry job and who are capable of doing an industry job and who want one. He’s very good at finding us a good place to work. Through your instructors? • Yeah. • They’re all tied into the industry and they know what your skills are. They know what the needs are out there. • I wasn’t exactly 100% positive of how it would go. I had my eye set on a company when I came in because it was that company that really got me interested in machining. That’s actually the company I’m working at now. • The president of one company came in and talked with students. He does the manufacturing tour days around the state. I’ve been talking to them forever since then. We never talked about jobs. I never talked about working for him until now. We just talked about how I could improve some of my skills and what I’d like and what I should be doing if I like this. What I should be doing if I like that. He never talked about working for the company until we started talking about it in school more. • It’s a hydraulics component company. Once my teacher found out that I was interested in that, he gave me more stuff in the lab to do that played towards that, so I could get my feet more wet and be more interested in it. • He’s very, very active in the school. Do people wash out of this program? What’s been your least favorite part of this experience? • Everything’s good. • I really don’t have a least favorite. I had an idea of what I would be doing, but they blew it out of the water. I was not expecting school to be as great as it is because I know for all of us I thought you go to class and you wouldn’t see. You’d have new people in every single class. Our program is set up so we all stick together. We have all the same classes together. We can get friend groups and stuff like that. Our teachers don’t all come from a teaching background, so they feel more like friends than actually teachers and instructors. • I guess the only thing that would take me away from manufacturing would be our family farm. 165

How many grew up on a farm? Manufacturing executives like to laud the attitudes and skills of kids that were brought up on the farm. Do you feel like that’s an asset for you? • Absolutely. Because growing up on the farm you pretty much get taught that you have to work hard to get what you want. It’s pretty much a good work ethic and I believe that’s what companies are looking for is a good work ethic. Then, I always work hard. • Farming gives you such a better understanding of manufacturing and why you do it like that and how it’s used. You just have a much better background, so then you can just do it better. • You’re always working on your stuff. You’re not working on somebody else’s so you can’t just go, “I’m just going to slap it together because you’re using it.” It’s going to be something that you’re going to use forever until it breaks for good, so you’ve got to make sure you fix it right and do it right. With animals too, you’ve got to make sure you take care of them otherwise you’re going to lose the animal. Is that work ethic disappearing from our culture? • Many: Yeah, Mm-hmm (affirmative). • I know a lot of manufacturers would say that. • It seems like the drive in kids has just tanked. I only graduated with twelve kids, but I was the only guy out of my class to go to school, to college out of high school. It’s really sad when there’s so much opportunity in any technical degree really. It’s not just manufacturing. I don’t know they just don’t have the drive and they’re not really educated to know that $12 an hour starting’s not going to get you very far. Manufacturers sometimes say that the younger generation lacks some of the traditional “soft skills.” • Yeah, we tend to try to weed those people out and most programs do that. If they don’t show up, they don’t belong very much because it’s professional. Even in school you have to learn that that’s not acceptable in a job, so it’s not going to be acceptable in school. How do you weed them out? • They get kicked out of the class that they’re in. (Name) makes it two or three skip classes. It’s two or three unexcused and then you going to have a very stern talking and the next time you’re not going to be in class anymore

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for the most part. That’s includes showing up late. • The first year there are definitely more. Our second year, not as much because once people get the picture, they’re gone. • I think kids are getting lazy. They don’t want to wake up early and go do a hard day’s work. They just want to lie around and watch Netflix and play video games. They don’t feel the need to get up, go to their job or earn money. They just have it handed it to them. I have quite a few friends I grew up with who never had a job because their parents provided everything for them. Now they’re in college. They don’t have jobs yet because their parents pay for everything. You see that lack of initiative to be responsible, to show up on time, to do your work. I think that all the hard working people are just fading out and going away. • Two of my buddies back home didn’t really know what they wanted to do this summer because they didn’t go to school, so they worked at a construction job. Now they’ve collected unemployment for the last three months. When you’re eighteen years old and you got your whole life ahead of you, you should not be on unemployment after one summer out of high school. That’s just ridiculous. The math is harder than you thought it was going to be. • I guess the only surprise I had was how they built their math class. Our tech math class is taught out of our hydraulics book for math. They took our tech math and they designed it around the mechatronics program. We do hydraulic equations. We do electrical equations to figure out how much power you need and what equals what and all this stuff. Then, they teach algebra and then a little bit of calc and stuff like that, just everything that you’ll ever need in ours is what they taught us. • Definitely the algebra was fast paced for coming from high school. I had algebra and then had geometry and geometry seems to be more understandable. Algebra moved along fairly quickly. • Too quickly! • You can get the help you need. • The class sizes are the nicest part about this school. I would say that you can actually make connections instead of being at a lecture with four hundred people. You don’t get to know the teacher. You don’t get to know the people sitting behind or in front of you or around you. 167

FOCUS GROUPS

Monticello March 2, 2016

Monticello Community Center

Let’s start with the skills gap. Everybody talks about it. How much is it affecting your business? • I’m in trouble if I have a skills gap. I think it is a population problem. I’m unimpressed with the quality of the students that are graduating, too. That worries me. You would think that it would be the easiest thing in the world to find a drafter from all these drafting schools we have, but it’s very, very difficult. I think (name) was perhaps right. The pool is shrinking and the quality of the pool is also diminishing from my perspective. Can you say that you’re less profitable or you have less revenue because you don’t have a sufficient number of employees? Has it reached to that level yet? • It hasn’t reached that level yet, but I’m mindful of that. • I have to say that the skills gap, it’s still concerning to me that we’re not reaching kids at a younger age yet with these skill sets to even show them what’s out there and that they don’t need to necessarily go to a fouryear school. That’s not for everyone or maybe even college at all. There Sponsor: Enterprise Minnesota Manufacturing Peer Council

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are a lot of companies that have training programs within and will train you on whatever skill set you want to learn. It bothers me when I work very closely with our high school and we’re finally starting something this fall with them and bringing them to our facility and learning on site there. It’s troubling to me that she’s talking about seniors in high school only. Hopefully, we’ll expand it. Why aren’t we targeting these sixth graders, seventh graders, eighth graders? That’s when we need to introduce them to all these various options out there for life and career options. That’s what troubles me. • I think there was a disconnect, too, between how manufacturing has changed and the message that kids were getting. If you look back 30 years ago, manufacturing was not a really pleasurable experience for a lot of people I’m sure. I look around this room or other places I’ve toured and manufacturing is a very clean, organized, process-driven, in my mind, pretty good career for a lot of people. • I think at the same time that was all changing and all these things were improving on the manufacturing side, the messaging in the schools was still like, “That’s what the dropouts do. You don’t want to go to a two-year school. This is our drive to support your four-year college.” I think chickens are coming home to roost at some point, and they had to, where the message was so strong towards four-year college that I think that’s where our shortage is. Like (name) said, if you’re telling a kid as a senior in high school that maybe you should go to tech school, at that point you might be too late. If you can show a lot of kids technology and mathematics and science and all these things early on. • I think that one of the skills that’s lacking, for example, is knowledge of how to do international business or global business. We have a difficult time finding somebody who can work in a small business environment, but with a global multinational company selling our products all over the world and having operations in different locations. What’s the profile of that person? • Maybe somebody who has worked in several different companies, maybe some large, some small, and been exposed to some of the global operations aspects in a larger company, but is willing to move into a smaller business. It’s a very niche thing. At the same time, I’ve experienced firsthand doing the training that our young counterparts get in China is much more focused on global business. They’re just focused on doing global business. To be honest, our headquarters here in a lot of ways doesn’t really think very globally, for example. You have to seek and attract those people 169

who think in that way. That’s a tough market as well. Actually, a growing market for that is international employees or international students, for example. • I think that the statement that it’s partially demographic is partially right. I don’t think that tells the whole story either. I think that one of the things, from my perspective, that’s a problem is that we keep talking about technical skills as career skills. They’re actually life skills. For many of us, when we grew up you learned how to do things with your hand whether at school or at home because that’s what people needed to do. • I’m a little bit curious. How do people who don’t know how to do anything deal with the maintenance of your home? If your door is squeaking, what do you do? I think there has to be a little bit more focus on the fact that they’re actually skills that help us be successful in life as a whole and not just in a technical career. Sometimes it leads people down that path. The other thing is I think with a lot of the conversation around it, we need something like an apprenticeship. The state of Minnesota is all over apprenticeship programs right now, which I think are one solution to this problem. If we only have one play in the playbook, we are never going to win this game. We’ve got to realize that apprenticeship is a great thing for some people. It works in some companies. It works for some employees, but it’s not the only answer. We can’t just be singly focused on that one thing and think we’re going to solve this issue whether it’s demographic or it’s an educational issue. Does that transcend into a lack of soft skills in employees, entry-level people? • I see it as a mixed bag. We’ve hired quite a few young people recently. I expected there were going to be terrible problems with that. In the last year of some of these younger people working for us, there have been no issues with tardiness, no attendance issues. They behave well on the job. They’re learning and they’re moving forward. As a parent of daughters who are teenagers working in other places out in the world, some of the things they tell me about young people they work with, clearly this is an issue. It’s a mixed bag for me. • I’m in Brainerd. In that market, they’ve done a tremendous job of this career readiness and the skills gap. I’ve got a freshman and a sophomore in high school. They’re actually registering right now. I’m in the boat with looking at classes. There definitely is still very much a college prep focus at the high school level. I won’t deny that, but there is a tremendous amount of opportunities for those kids who either don’t have the wherewithal 170

for whatever reason to get to college or the aspirations or just not the qualifications to get there. There are all kinds of opportunities in our market because of the cooperation with a couple of different agencies, the college and the chamber and stuff, to get kids ready and to make them aware of those things. I think that in local areas, certainly in Brainerd, I can tell we’re doing an outstanding job at that. If there’s a skills gap in our market, it’s either demographic or it’s job availability or there are more than there are kids. • They’re going to metro areas. They’re going to Alex. They’re going to other cities and we’re losing them, which is the nature of the beast. I think as a state we’re bringing everybody up. Everybody will be better. In our market I think it’s more a demographic and economic issue. Given the aggregate heartburn that manufacturers have over the skills gap, do you think that’s a likely problem to have a glut of qualified workers? • I think it’s going to be in certain areas. If you go to the metro area where the demographics are much larger for job sources, I think that’s less of a problem. If you go to a micro market like Brainerd, you absolutely can have those issues potentially. That’s just economics. Kids are going to move around. For a lot of kids their goal in life is to go to college and get out of Brainerd. They don’t care how. They just want to get out. I can’t tell you how many people I’ve interviewed, hired 10, 15 years of a career behind your back. I’m going through that right now. We’re hiring two higher level positions and not a lot of people applying. It’s other people who want to go back to Brainerd or get there. • One thing that may not get mentioned either is that a lot of the, I guess I’m making some assumptions here. Again, looking back 20 or 30 years, there were a lot of very simple operator type jobs that were available. Those get replaced by automation or whatever it may be. When you talk about a skills gap every time you eliminate one of those jobs, you’re probably creating something that takes more skill and more ability. • Realistically, you’re hoping that there are that many people moving up into that category of job. There may not be. The other issue is that everybody might be looking for more qualified workers because that’s what they need. If 20 years ago, 30 years ago you needed 20 operators and now you need three, that’s going to change things as well. We can’t assume that all those operators are going to eventually be production managers or programmers or whatever it may be.

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• Even the many companies that have gone from high volume a number of years ago, a lot of that work moved to Asia. Many of us are now lower volume production. That changed the need for workers. I had to be able to do more and to have greater level of skills. We just don’t have that repetitive work over and over and over again. I’m always happy to have (name) here. How do you describe the efficiencies, the processes that people can use to address the potential solution to the skills gap? • It’s something we’ve been putting a ton of thought into over the last several years. You realize that the survey is going to say that most of the years that the survey has been out there. Skills gap has been a concern. It’s been a focal point to an elevated situation. One of the things that we started to realize in the last few years was this was well beyond manufacturing. Healthcare is talking about not being able to find people. Professional services can’t find people. Construction can’t find people. They’re all looking for the same people at the same time. It’s not that you can’t get them to do manufacturing. There’s not enough of them for all the agencies. We started to think about how we address this. What we find is that the broader subject of saying how do we attract people and find people is usually outside of the immediate control of the manufacturers themselves. It made us think about things that manufacturers do that they have more direct control over. First of all, frame the problem on the workforce side. It’s about how attracting is almost impossible. We have to develop every player we have because they have to be able to do more to fill all of the needs that we have. Third, we have to retain them because we can’t afford to lose any of them. See problem one. We can’t find them. If you capture that, the puzzle pieces integrate together. We talk about this puzzle piece because they have great potential individually. They multiply stronger when you insert them together like a puzzle. Obviously, talent is one of them. How do we develop these skills—the life skills, the essential skills, the technical skills, the broad mix? How do we address those pieces? It’s into leadership as well because the leaders will influence the ones below. Talent is one of those four puzzle pieces. Strategy is a critical piece. We have to be able to tell all of our employees where the devil we are headed because if we’re going to retain them, if we’re going to attract them, we have to give them a position to be tied to. Strategy is critical.

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Continuous improvement, because we’re saying our businesses are always evolving. They always have to get better. Continuous improvement has to be ingrained in the organization. It’s the third puzzle piece. The fourth one is the management system, the structure that we allow people to be successful in. We subscribe to ISO as a management system. To use, we think that’s a great infrastructure. If you put those four together, talent and strategy and continuous improvement and management system, we believe that the integration of those is the more direct attack that businesses can have. Is strategy something you think more about more formally? • Our company has this year more so than we ever have. It’s just been neat for having a better process to follow to get us where we want to go. In the past, it’s just been something we tried to do ourselves and done so-so at it and not always been happy with the results. • I read a book called Traction four or five years ago. I was on board and said, “We’ve got to do this.” I bought a book for all of my leadership teams that we need to do this. This was about the time that my father and mother were stepping aside. We implemented it. Traction generally says 50 to 250 employees and we’re at 260. We have it more so for our top management and then to go down to their teams. It’s not by the book, if you will, for what Traction says. That definitely helped us with having strategy for one year, three years, and then 10 years. We still meet biweekly on that and implementing pulling that into our high school is what we’re working towards as well. • I echo that and we also did the Enterprise Minnesota strategic planning process, which actually led us to action, which was a very positive process. What we’re now implementing is game-changing for how we think of strategy. • We’re a 64-year-old company with about 425 people across 10 business units. Strategy is still very new to us. We’ve done a lot of “I guess” and “by golly, ain’t that lucky?” I do believe you make your own luck, but I don’t believe you can make enough of your own luck today with an up and sell strategy. The last couple of years we’ve started thinking about it more, putting more effort into it. We’re still learning. We don’t know what we don’t know in the area of strategy development. We’re spending more time on it today than we ever have. Is there much of a challenge bringing the whole team onboard? • Huge. This is foreign to us. We’re a heavy engineer-focused business. I 173

like to say we’re founded by engineers for engineers. That’s good and bad. If you want to create something really cool and create a great solution, it’s a wonderful environment to be in. If you want strategy, that’s putting a box around things. Engineers don’t like boxes. They want to create the box that somebody else has to fit in. They don’t want to be the box. • This is particularly challenging to get everybody on board. We’re in our second generation of a family-owned business and with a couple of fingers of the third generation involved in the business now. To some extent, there are different philosophies on all of that. All three generations are still involved on some level. There are some significant differences in viewpoint there too. Trying to get that to gel together is challenging. Do you see that it’s being transformational for your business? • It’s too early. I think for a couple of businesses that are further along I think so. It’s still pretty early days for us. • I’d say joining training and strategy and setting a vision. We also are two years into implementing Traction as well for our management strategy, besides management system. It’s been huge just in terms of setting a structure that ties the top level strategy and makes it clear all the way through your organization, but then also translates down into simple concepts, meeting tools. You address issues and to dos every single meeting. That will end up making the score visible and dedication and commitment to training existing employees. I think (name) hit it right on the head there. Anybody we bring in new, there’s such a lead time to learn our industry and specifics that we’re finding it. We’ve got a great base of existing employees. Some of them like where they are and are top dog, but there are a number of them who have surprised us when we give them opportunities to get some additional training and learn new things and they step up in their own development. We’ve been happily surprised with a number of cases. The ceiling is a lot higher than we thought on certain individuals. Let’s go there. I’ve been surprised by the emphasis on training. Do you have formal training programs that you put into your own internal infrastructure to help retain and grow the employees that you have? • We have two prongs to that. One, we have a formal management training program. It’s a two-year program. In that particular program, it’s always fresh hires. We call it minds full of mush. They have to have a college degree. We don’t care what in, really don’t. It doesn’t matter what discipline, but a four-year degree. Then, they will work in every aspect of a variety of businesses. We break that into four six-month terms. They 174

will be at a different one of our companies in each one of those terms. Sometimes we’ll split one of those into two depending, but they’ll be at at least four companies and they’ll do everything from processing accounts payable and order entry to some inventory management. They’ll run the press brake. They’ll get out in shops more and do a variety of things just to see what sticks and what the individual gravitates to. Then, when they graduate from that program then we carve out a little portion of the business or something to do and give them that area of the business and see if they can do it. With all of that stuff, I’m meeting Enterprise in the organization and see where it goes. We’ve had probably 26 people go through that program over the last six to eight years that we’ve been doing it. We try to hire one new one every quarter to do that program to follow the pipeline. That’s prong number one. Prong number two we call employee fulfillment. Each of our managers and supervisors are tasked with developing some level of training for each individual. Some are better at it than others, but we also use that as a tool to evaluate the supervisor on “are they doing right by the employee?” That could be anything from just doing some specific in-house training to taking a class at the vo-tech or taking a college course or going away to some specific training around the country. It’s application-specific. We task our managers and supervisors with that. How about the new 2015 ISO guidelines? Do they interest you? • We’re starting the process. It’s a lot of work and especially we’re known for our customized trailer divisions. That’s our biggest concern. Can we do that and be certified with the customized? We’re sure that, yes, we can. Just working out the kinks and the works that come along with customization will be our biggest challenge I think. Let’s talk about performance. Was 2015 what you thought it would be? • We have a number of companies in a variety of markets and so we believe we’re fairly diversified. We lost ground in a lot of areas this past year. There was a lot of optimism in our customers up until late fourth quarter of last year. And that’s when we started seeing the results, but nobody was talking about it. Here in the first quarter, now all our customers are finally talking about what they were reacting to in the fourth quarter. • We were well below what we expected probably a third or a quarter of the growth that we expected. I think it was the economy. We’re heavily into commercial and residential construction and that definitely has been having really good forecasts and really poor performance in the forecast over the last couple years. Actually, going beyond that, we really put no expectation on 2016 in that it’ll be a record year by the way it’s going so far. It’s crazy. 175

• We also underperformed and only hit about 20 percent of our budget increase. We, I guess, were a little bit too aggressive in our thinking that we could execute projects, new development, and innovation and get them to market and capitalize on them. Projects take much longer than you expect, especially for companies that aren’t used to dealing with projects of those scale and complexity. • We didn’t hit where we expected to be either. We have a lot of diversity in terms of the markets that we serve. I think that one of the things that I see as a business owner is, it’s hard to come across a year anymore where every segment that you’re serving seems to be performing, at least they’re stable or they’re growing. You see more of these ups and downs every year in different industries and so even diversification has become not quite a sure-fire strategy, if that makes sense. • A commodity slump and Chinese demand impacted us. Domestic demand and our own sales volume were actually decent last year. • I’m involved in a contracting business that does work outside of the shop in the field of our star customer base—mining companies, coal-fired power plants and paper mills. We didn’t expect much last year though different than some of you who maybe expected more and you got less. We knew we were in for a long year and it was a long year. No, we’re encouraged. We’re thinking that towards the end of this year things in our business are going to pick up because we believe that things are going to pick up. How about this year? What are your thoughts for 2016? • So far 2016 looks good for us. We actually at the very end of 2015 secured a new customer and I think they’re going to be in our top five for sure for 2016 set up. • I think it’s going to be a tough year from what I see. We’re not very diverse. We have a decent number of customers, but they’re all generally in a similar industry. Last year we had a fantastic year because that industry was going really well. It seems to be okay still, but if that falls out then everything falls out for us. My customers are not down, but they’re not excited either. • Our forecast for the year is a lot of uncertainty and, like I said, based on performance of the economy. We did a couple different forecasts and we were looking at between zero and ten percent. For whatever reasons since the first of the year we’re at a 20 percent growth base. I don’t know 176

the uncertainty isn’t just uncertainty; it’s real because the market is so unpredictable right now for us that it’s just, hang on, and try as hard as you can. Many of you have been through recessions. Did you learn things in 2008 and 2009 that would make you better prepared to deal with it if it happens again? • I think that’s still two years off, but I do think this is going to be a tough year. To answer the second part of your question, did we learn some things? Yes, and actually we’re taking action right now, I’ll say a bit preemptively, so that we don’t find ourselves over the barrel like we did in 2009. For us we’ve got a long history. We’ve been a very financially stable, self-financed organization for a long, long time. We believed back in late ’08 when the sky was falling our business was still good through the end of ’08. We said that’s probably not going to affect us much. We didn’t know what we didn’t know. We had no idea of what was yet to come and by the time we got into the first quarter of ’09, end of the first quarter of ’09, we were not prepared for what was to come. We waited far too long, too cavalier that we’ll just ride it through for a year and everything will be fine. It took longer than that. It took an awful lot of financial resources to do that. We’re not willing to go there again and so we’re taking preemptive action right now. • Our industry feels a lot different than ’08-’09. I think we learned a lot then, but it was very demand based; reduction in demand drove the ’08’09 years for us. We just had nowhere to go with it. It’s a lot different now. We’re 80 percent and our company’s 60 percent automotive. Our industry’s 80 percent automotive and automotive’s still strong. There is a demand there still. It’s more supply and just the strength of the dollar and the commodity slump’s impacting us now. A lot of manufacturers saw the last recession as a time of opportunity. Are you ready to make it an opportunity if it happens again? • Absolutely. We didn’t plan for it. We just figured we’ll ride through it. Now, yeah, there are some opportunities I’m already thinking about in zero to five years if we find ourselves on that trend or close to that trend, there are some opportunities that we’re going to bounce on and exploit for sure. • What I learned is that we live in an environment where you can’t coast any more. As the leader of an organization, it is constantly pushing, pushing, changing, rethinking, updating strategy, training people, preparing for whatever is in front of you. If manufacturing as a whole would grow I think maybe we could get back to coasting, but I’m not seeing that happening. It’s just a constant push forward. 177

Another legacy of the recession may be that supply chain relationships became more demanding. True? • In our market there’s been a considerable consolidation of OEMs. The reason we’re all here is because we adapted to survive the recession. A lot of companies didn’t. Our large customer base is much larger now because they want more and they make it definitely playing by a different set of rules than these smaller manufacturers. We have to participate otherwise it’s going somewhere else. • Our relationship with OEMs is different than it was before. It’s gotten closer I think. The lines of communication are more open. At least I find from my perspective I can express that I find that OEMs are often listening to that. We’re also more selective about who we work with. Years ago, an OEM that knocked on your door you start quoting for them. I just had a large OEM, a very large company, used a consulting firm and they must’ve gone out nationwide for bid to a whole bunch of people. They wanted everybody to just bid on this work. We have no idea of what these people are like to work with. We’ve seen their work before, never talked to them in person and I told them we won’t bid on it. I don’t know how many phone calls I got from that company saying, “You’re not going to bid?” I said, “I’m not going to bid.” We know this isn’t a good deal for us. I think some OEMs are getting, some suppliers, are getting more savvy about knowing that you have to find your niche and you have to find where your fit is or you can’t be successful in the market. Are OEMs sacrificing innovation and collaboration in the name of price? • We’ve actually seen it go into reverse with many of our OEMs. They want us to bring innovation and they want to collaborate on cost reduction projects, but they’re more willing to collaborate on those. The price discussion has gotten a lot of our, there’s been a lot of consolidation and in that there have been a lot of purchasing groups that have had a lot of power. It seems to be going the other way towards engineering and quality now. A lot of our customers are steering the shift along with marketing because purchasing has made a number of missteps and there have been quality issues and things like that. It’s been almost the reverse in some ways. • We’ve seen in our OEM customers a move from engineering led companies to purchasing led companies now to quality led companies. We’re actually using innovation and driving innovation to take costs out. We’re using that as a tool particularly with our largest OEMs. How? 178

• Several ways. We’re a fairly vertically integrated organization and so we’re taking in the electrical control panel portion of our businesses which is mainly what I’m talking about in this context. We’re used to buying off the shelf components from major manufacturers and assembling in a particular way to solve a problem. What we’re doing now is we’re leveraging another one of the companies that we own that builds a better control. The distribution portion of our business is not real jazzed about it because their major lines will be significantly impacted by that. I look at it and say if we know the guy down the street who wants the business I have, he’ll do it. He’ll figure it out. He might not have an in-house resource like we do, but we believe in a little concept called cannibalize your own product. Let’s talk about foreign competition. Is it more or less of an issue than, say, five years ago? • I think in the job shop or contract market as I see it is we’re just used to it now. What’s gone is gone. I’m still hopeful that sometimes things might come back, but it’s just gone and so it’s a different world than it was before. Honestly, people don’t talk about it too much anymore. We don’t think about it that much anymore. We’re just working with what is available for us to do and trying to be innovative and creative in those areas which is typically lower volume, more highly engineered stuff. Stuff that’s changing a lot and it’s too hard to offshore that better to do it closer. It affected us more with some customers. Canada, we had a large portion of our business there, 30 percent probably three years ago and not so much anymore. Luckily, we have customers in the states that have done really well to offset that. We were lucky that way. What about the dollar? • We’re principally a North American supplier in the railroads. Our major product lines are used widely in Canada. Of course, that’s changed quite a bit. There’s a lot of pressure. We’ve got contracts, all of our contracts are written in US dollars, so it’s something we’re sure of. There’s a lot of complaining on major railroads to major committee in railroads about that now because they’re back to a 30 percent disadvantage. • We have benefited from international expansion. I think that’s what companies need to focus on now if they’re going to expand, not just to source or have cheaper produced products. Although, that landscape is going to change very quickly here if the TPP is fully ratified because you’re going to see countries like Vietnam, for example, really being one of the main benefactors of that. You’re going to see a lot of focus shift out of China, I think, as a result of that on the sourcing side. What China, for 179

example, offers is a huge market and that’s what Asia offers. I think that’s where the focus needs to be for American companies. It’s to find how they can expand their business internationally. There are a lot of different things to do. One last issue: What about the cost of employee-related health care? • It’s an awful deal. In our history as an organization our founder has had the strong belief in taking care of the employee in all facets from an extremely strong retirement program, strong medical. Up until about seven years ago we didn’t have a premium for employee health care including family. That was a zero dollar coverage. You had a $50 deductible actually for the year, and that was it. Everybody was covered and you could go where you wanted to go. Then, we started changing. You can’t afford it. We’re still well ahead of in terms of coverage and cost. We’re better than our competition, but it’s a real cost of doing business. The number one cost regarding our business is people. Number two is what we call group hospital, the medical benefits that the company is funding for those employees. We look at that a lot every year trying to figure out how to balance the cost while providing the high level of quality care. This is very challenging. Has the government intervention in it changed the outlook—made it better, made it worse? • Worse. • Worse. • We pay so much more out of pocket now. The lump sum that we had to pay in January was $16,000 this year and $16,000 last year and that doesn’t benefit any of our team members. You’re kidding. It’s always been something manufacturers said that they did for employees to offer health insurance. We had good health insurance and we paid for a lot of it. That was a great benefit to people and we don’t have that anymore. Again, it’s of no fault of our own. Our insurance just continues to get worse and it doesn’t matter if you’re an owner or a shop floor employee. Even for me as an owner of a company, if one of my kids get sick I think about where we’re going to go to the doctor for it because you have no idea how much of the bill you might get in the mail. When a minute clinic seems like an option, I’m going to the minute clinic because at least they publish how much money it’s going to cost me whereas at the doctor’s office you don’t know. I think every level of an organization thinks about it differently than they used to.

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• Yeah, we’ve also seen along with that as we’ve increased the level of financial participation with the employees in their health care with us. We’ve seen that translate into more Monday morning Workers’ Comp injuries. Because that’s free health care. The most expensive health care a business will ever pay for because you’ll never pay more than when it’s done in Workers’ Comp.

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FOCUS GROUPS

St. Anthony March 2, 2016

Bremer Bank

In last year’s survey, 89 percent of manufacturing executives told us they were very optimistic about their companies’ prospects for 2015. Were you one of them and how did it work out? • We had a very good year. We ended up with a few more new customers than we anticipated which really helped us. The growth wasn’t where we thought it would be. • It was a good year. We sell into a lot of different markets so overall it was a good year. Domestically, we did a lot better than we did internationally. Internationally, it was a tough year. Overall this company grew. • A lot of old customers came back. I don’t know what drove it, but I’m happy that they came back. • I’d say it went okay. We geared for better improvement than we saw. We were expecting about nine percent improvement, and we grew about five, but we really did a lot structure changes coming out of the recession. We put a lot of things in place to be able to grow. Now we have a lot of Sponsor: Bremer Bank

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capacity and we’re really waiting for housing to take off a little better than it has. Our commercial side’s doing really, really well, and I can’t tell you why, either. Same customers across the board; everybody’s real busy. Let’s now adapt it to 2016. Are you in that same mindset that you would’ve been last year? Are you optimistic about your prospects? • Yes, but I think most people in this room or most business owners are an optimistic lot. • We had just the opposite experience. We introduced more international products last year, got some certified products, and we’re doing a lot of business in the Middle East, so again, it may be driven more by our company than the economy. • In the business that I’m in, you tell what’s going to happen in the next two months but after that, it’s anybody’s guess what’s going to happen. At this point, it’s pretty dismal. On average we service maybe 15 or 20 industries. We’ve got about 200 different customers, and most of the larger ones are being very, very conservative. They’re only buying what they absolutely need and there’s just no way to gauge where they’re heading. When they finally do get an order, they want it tomorrow. Nothing new under the sun there. What’s their hesitancy? • Total uncertainty, certainly. I just have to attribute it to the overall economic conditions, at least business to business. • It slowed down about 20 percent in the last quarter of last year, and then this year, the first quarter is slow but I can see it picking up. It’s also dependent on your mix of customers and the type of business that you’re dealing with. In the metal fabrication business, you’re dependent on your customers. You can hear and see their forecast, but all bets are off after a couple of months. It’s pretty soft at that point. Did having to endure the sudden recession of 2008-09 have an effect on how you manage your business? Would you more able to weather an economic storm? • I think it’s fair to say that overall, at that level, it’ll come down some. If I could point to just one area where we’ve seen a number of our customers improve, I know it’s difficult to budget and forecast, but a number of them have gotten more disciplined on month-by-month forecasting for the whole year. Certainly, you’re not necessarily going to get that, but you can kind of manage to something, so we’ve really seen improvement in our customers 183

doing that and it seems like it’s helped them. Let’s talk about the skills gap, a very big issue in previous State of Manufacturing® surveys. Is it better; is it worse? • It’s worse. You’ve got to train from within. You’ve got to find someone who has the capability of learning and has the skills to learn, but to find someone who is already skilled, it’s very difficult. It’s hard for a small company to attract employees when you compete with the major names out there. • First off, manufacturing isn’t glamorous, so it’s really hard to attract young people into it. We certainly see a skills gap. We are working with St. Cloud Technical College and doing classes right in the facility. We’ve now got 40 percent of our work force taking classes—basic and advanced math classes and print reading. In some of the advanced classes, we’ve determining who has the ability to rise up and become our technical folks. In Foley, they’re not just hanging out looking for a job, so we’re trying to create folks who can do it in the area. • I think it starts from the high schools, they don’t have the shop classes like they had years ago; they’re not encouraged to go into that stuff, they don’t even see it. Then you hear people say that manufacturing is dead and they’re off-shoring everything. But that’s not true, it’s more sophisticated. We have to buy expensive lasers and expensive equipment—and we have to find people to run it. • There are no role models. Name anybody on TV who works in manufacturing since Laverne and Shirley. That’s a big problem. All they see is CSI and Criminal Minds, all sexy stuff. We can’t compete with that. And we can’t compete with the larger companies. (Name of company) works with Dunwoody or whoever, they’ve got programs and hire the kids before they even graduate. People of our size haven’t got a chance. So what we get are the guys who aren’t happy working in a large company and would prefer to work in a much smaller environment. But most of the Class A people are very hard to find. • In Minnesota we’ve talked about working with the schools to develop talent, or to bring in manufacturers. Last year the legislature passed a skills initiative type of program to provide apprenticeships between the manufacturers and schools. The Department of Labor was supposed to take the lead on it. I have personally not heard anything about it since. The bigger companies are doing some of those apprenticeship programs on their own because they have the size to do it. A chamber of commerce 184

affiliate in Chicago has a very strong apprenticeship program with a certification program that they’re working with other states to develop. Principally they’ve been doing it in the Detroit area, around the automotive industry and a couple of other major manufacturing cities. I’m not sure why we haven’t caught up in Minnesota. • I think unions want to create jobs for their union employees, but it doesn’t have to be union affiliated. What about the non-skilled worker, the entry level worker. Do they offer their own challenges these days? • The millennials are a different type. That’s a discussion we have all the time. How do you get them to be in on time, or that machines have to be running. It’s not social hour. • You just have to work with them. When you start seeing bad behavior, correct it right away. They don’t last. They don’t care if they have to move to another job. It’s more social stuff than it is work. • I used to think the same thing, but I’ve adopted this philosophy, “New growth comes from new thinking.” I said the same thing, “These millennials, they know nothing, they don’t work hard,” but I determined that I’m the problem. I need to learn to interact with them. I used go to the U and give talks on manufacturing. We used to have a lot of people come to our company from the U, but they don’t do it anymore. I do the presentation and there are more students to choose from, I’m not cool anymore. “Some old guy came and talked to our class today.” I’m not relevant, so I’m sending off our younger people who think our place is cool, because we do a lot of cool things. We’re finding more luck by changing our message, and the messenger, to be more relevant. Once they arrive, do you have to change your culture to adapt to the way they want to behave? • Yeah, and we’re not executing that as well as we’re going to need to. Yeah, I think the millennials, we talk about team work. I think people from, certainly my generation, know what it takes to get the job done—you stay until the work is done. I think millennials say, “I can’t help it if you’re not efficient. I’ve worked six hours of my eight-hour days. I’m out of here!” Is training a big part of that, though? I mean, active training of a new person, so they know what you expect from them? • It’s absolutely training, and relevant training. Not training the way I would be trained. I think it’s very non-traditional. I think it’s hard for a 185

guy who looks like me, and I’m in my mid-50s, to say, “Boy, why can’t you learn the way I learned?” I’m dealing now with what I learned from my dad. I couldn’t stand learning from my dad, and I started in my young twenties and he was in his mid-50s. It was painful. Now I’m in my mid-50s and have a lot of respect for my father. • Talk a little more about relevant training. What’d you mean by that? That’s an interesting point. • How you find people; you really find people through social media. That’s not my gig, I just don’t like it, but if you’re not on LinkedIn, if you don’t have people tweeting cool things, or Snapchat. If they’re Snapchatting cool things that they did at work, “Hey, I made this,” or, “I learned this,” it’s amazing what people Snapchat. You would think nobody cares, but they do. We’ve had a lot of luck bringing people in through referrals. Rather than posting jobs, we’re getting a referral system. We actually have a line-up of people waiting to work for our company. Again, we’re the same company. It’s not because we’re cool, it’s because someone’s talking about us in a way in which I can’t reach these people. Well, understanding that is sometimes a stumbling block for upper management. Some experts are saying that a significant challenge for finding future employees—skilled or not—will be demographics. The population won’t be there. What do you think of that? • I agree. Today you have to make large investments in computercontrolled machines, fancy machinery, robots and laser-cutting machinery. And you have to have people who understand that, so we have to send people off to school, and then train inside; purchase the proper equipment and then train. • What about that—formal, strategic planning? • We’ve always done it. There have always just been four of us, we get together and we come up with the plan for the year. We try to do three and five years but it’s always just one year, and then we have meetings and we tell everybody what the plan is, and that’s taken us so far. This year we hired an outside coach who told us we needed to broaden our team to that next level. So we had 15 people this year, including that next level of managers. The first two days were super painful for me, but the energy and the work product that were generated were worth it. There’s pride in helping develop the plan; they’re not going to let if fail on their watch. It was genius. I wish I had come up with it on my own, but I didn’t. 186

• We do that, too. I come up with a strategy map, once we go through that, there are monthly and quarterly management reviews for ISO. We pull the map out. These are the continuous improvement projects we have going. How do they fit into the boxes? Are we doing the things that we set out to do? So it’s kind of checks and balances and following through with those things. • When we first did ISO a while back, 10 or 15 years ago, it was customer-driven, but since we’ve strapped it on, it’s entirely about us and how we want our manufacturing plant to run. • We don’t manage ISO as a stand-alone thing. It’s just deeply embedded in what we do, how we all are processors, so we don’t think about it being ISO, it’s just who we are. • I agree. It’s not a quality management system, it’s a business management system, and if you look at it that way, it works. • And 2015 doesn’t sound as onerous to us as it might appear on the surface of what people talk about. What about putting a greater emphasis on retaining the people that you have? Is that part of formal planning? • We’ve done two things this year: one is we started surveying, so we’ve identified the top key things that the employees are looking for or think that we’re missing, so we’re addressing two of those issues, to try to figure out how to manage those this year; and the other thing is we’ve identified future leaders, so we’re giving those people more time, more energy, and trying to spend more time with training and leadership and making sure they know how we feel about them. What’s the feedback so far? • Good. The survey is relatively new; we’ve rolled it out to everybody we want to hear from, employees and small groups. I think the hard part is figuring out how we manage those tasks. I think the feedback’s been great; I think they appreciate it. If we don’t do something, then we’ll fail. Then it won’t work. The leadership side of things is going great. I think we just have to make sure everybody is doing it. How did you identify who you thought the future leaders were? • The managers had brought people to the leadership team, so it was at a management level. 187

• So not a profile test? • No. We do do a profile test, so we do have an idea of who people are, so I think if somebody were to bring someone that the leadership team didn’t feel was appropriate, we would speak up pretty loudly. Are other people doing it? • We do the exact same thing. We survey our folks every year, we pick on some things that are good and we celebrate those, and we find some weaknesses and we try to shore them up. Then certainly, we promote from within and when somebody is promoted we kind of make a big deal out of it so that others say, “This is not a bad place to work.” I think we’re experiencing a little bit of a down-side to it, too. Our tenure is getting really long. We went through the recession in housing, so we didn’t hire a lot of new people and now in Coon Rapids, now we’ve been there for 35 years, but our average tenure is 15 years. In Brainerd, that plant’s only existed for 18 years and our average tenure is 13. It’s nice to bring in some new blood, just new growth from new thinking. We’ve struggled with that more than we have the other side, I think. • We’re somewhat similar. We’ve got an aging population, and again, in the type of business that we’re in, there aren’t a lot of young people that we’re able to attract. Generally, you get late 30s to middle age type people. Our particular growth hasn’t been much more than organic over the last few years, so as a result of that, having a formal plan wouldn’t really do us much good. What we’ve tried to do, based upon what I had gleaned, was that people in our line of work who make blue collar type of salaries, one of the largest concerns they have is financial pressures, and financial stress contributes, apparently, an overwhelmingly large amount of worry for them. So we’re really focusing on trying to educate people on the 401(k) and getting them to save for the future, and at least feel like they’re providing for that. It’s not a big deal in the grand scheme of things, but if it’s truly financial stress that’s causing people concerns outside of work and bringing it to work, we just thought let’s just try to emphasize that. One of the things I want to talk about here next is healthcare. The cost of providing employees health insurance, but wellness is such a big piece of that, and financial well-being has become such a huge part of that. • We do a health-risk assessment for people and that was the number one contributing factor to wellness in their mind, was that they’re worried about finance.

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• We’ve been following a similar philosophy. Ten years ago there was a book written by Tom Rath and I can’t remember the other writer, but talks about the five areas of well-being, financial well-being being one of them. Everybody kind of focuses right away on physical well-being, they’re doing their screenings, they’re taking their health assessments, and blood drives, but personal improvement deals with a lot of other things. It could be their career well-being; did they see a road map for what their success is going to be in that particular role? Financial well-being is a big one, where the stress of, “Where’s my, not necessarily what I make, but how am I going to manage my costs, my expenses and all that?” • Wellness used to be just physical, and then it’s been broadened out to the five areas, community, social, financial, and then career was a big one as well. Career usually trumps them all. If they’re not engaged, they don’t like their supervisor, they don’t feel like there’s a path going forward, they’re not going to be engaged. Typically, those are the ones that you’re going to turn over and not be able to retain. I think a lot of people are focusing more broadly than just saying, “Let’s do the physical well-being to save on our healthcare costs.” Now it’s more of like, “How do we keep our employees engaged and active and maximize their potential?” So, that’s a big one that people are seeing, so yeah, it is a growth area. Related to that, how do you assess the challenge of providing health insurance for your employees? Does it still give you heartburn as a manufacturer? • Constantly. • It’s getting more expensive and we did embrace a wellness program. We’ve had two health risk assessments and we’ll be on our third. I’ve only got two data points and I didn’t see much improvement. There were those who were drastically ill and that was a benefit, they realized they had to go to the doctor. Not to get off the point, but just the complexity of the ACA and the uncertainty of what’s going on and whether it’s going to be with us or not be with us. Do I go with individual plans, do I do this, do I do that? You have to and you’re obligated financially and fiscally to investigate all these various individual options. It used to be pretty cut and dried, like here’s your group insurance plan then you pick a couple options and go. I would say it’s getting more complex. • I think providing health insurance to our employees has always been heartburn from the aspect of always having escalating costs, escalating premiums. Complicated by the fact that when you’re small and you have

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one or two say cancer events, or large events, that your prices skyrocket. In terms of the government fixing it, we still provide, in our philosophy, we still provide healthcare for our employees because we want to make sure that if they have any major events they have got coverage that isn’t going to disable them financially, and catastrophically financially disable their life. The insurance is the insurance, it’s the coverage. What’s onerous is all the new reporting and things that we need to do to tell the government what we were doing in the first place. We had affordable healthcare coverage for the last 26 years. Now the government thinks that we need to fix that. The reporting around that issue is just very onerous and outrageous. • I agree with you. We had a very bad year last year. We had a death due to cancer, we had one person with scoliosis—you know when you see those advertisements on TV for drugs, I mean those are $1,000 a pill. We had a $90,000 tab to cure hepatitis. Anyway, for our size of 100 participants, it essentially became unaffordable. My opinion is inevitably, if we’re going to stay this route, we’re going to have to make it a national health insurance for the catastrophic cases. Because people of our size, a $20 million company with 100-150 participants, you can’t absorb it. I think inevitably it won’t be affordable for employees. Essentially, you will be offering them catastrophic insurance for the price you have to pay. Is there anything you can do about it, or is it just part of the cost of doing business? • Not to get too political, we’re in the middle of the political season. I think all onerous things, the compliance issues that the government is putting on is really holding us back. For someone in my age bracket who just came through a recession, we were fortunate to be in a decent financial position when we ended the recession. Then we got a lot of work from people where our customers said we have an unhealthy supply chain and we need to consolidate it, so we have to sacrifice some for the health of the others. We were fortunately the recipient of that. • Now, whether it’s the way we run our business, but we have some older equipment we want to invest more in. New, faster, CNC machines. We have a bunch of CNC equipment like you do. Interest rates are low; it’s a good time to borrow. I don’t have the confidence to go to the bank and take out a loan. We have no debt with the clowns that are running the show; I just see it coming again. There’s not time for me to recover before I retire. To get all my debts paid and take the risk. I think that the current election is pivotal. I was hoping that we’d get Ted Cruz and Bernie Sanders—two opposite ends of the spectrum—saying, “All right, pick a side.” Then we’d know and I might not like what happens but at least I would know. I’m 190

sure what’ll happen is we’ll all pull to the middle and we’ll get the mushy middle again and we’ll get more complaints, headaches. Since you brought it up, let’s go there. Does the political season contribute to the uncertainty of running a business? • It just adds to the cost. I don’t think there’s any uncertainty on most compliance issues. It’s just, as this gentleman said, you have to pay your invoices monthly for your insurance but you have to file a 5500 form that’s this thick to prove that you paid invoices to an insurance company. What’s the point of that? It’s $7,000 later. Plus you have to be audited on a 401(k) plan that’s been run through IAP. • It’s another 80 grand. • Yes, exactly, I mean, it’s just, it doesn’t make sense. Does it matter to your business who is elected the next president? • Hugely. • Sure. • Yeah. • Well, like I said, if you’ve got a constitutional ideal and a socialist, they’re going to have the bully pulpit to take you one way or the other, I think the country is kind of 50/50. I think we have to pick a side. Being in the middle, I just hate it; take a step of courage, pick a side and let’s go in that direction. I obviously have a side that I’m on, but you don’t know what’s going to happen next by being in the middle and I’m just sick of it. • We’re starting to see some people get nervous about China and trying to on-shore stuff, but I think the energy prices went down and all of sudden it’s equalizing things and so people are uncertain to move and it’s like, okay, we’ve got this election coming up, no one knows what’s going to happen, are we going to have someone do a trade war, tariffs, or make America great, how? Tell us how, we don’t have a clue, and this is just a bunch of rhetoric and so I think everyone’s just going to say, let’s just hang on and let’s see which way it’s going to happen. • I’m on your side by the way, I haven’t seen leadership in the economy, investment and everything that’s required to get us out of this two percent growth pattern and so you know, like it or not, I mean a guy like Trump amid all his inconsistencies, I mean at least he’s talking. I’ll be glad to 191

lead, I’m not advocating, I’m just taking it as an example, so we’ve got that problem, you’re right, we have gridlock in Congress, we can’t bring that all, the five or ten trillion bucks home because it’s going to get taxed. Where would that go? Well that would go into investment. • Interest rates are basically zero, so everybody’s chasing the almighty dollar, but they’re not investing, they’re buying back stock; well, what good does that do? That’s not investing. We’ve got this dearth of future growth because a lot of factors that have conspired, you’re not going to get out of it unless you’ve got leadership that says we’re going in that direction, here’s how we’re going to do it and you guys in Congress, you have to come along and find a way to make it happen. Personal opinion. • I’m voting for you. I agree 100 percent. • We have such a lack of confidence right now that nobody’s making decisions to spend on capital equipment and things like that. You know and for us, we have to give our customers year over year price reductions when the government’s putting regulations that increase our cost, we have to add staff and do those things to track some of those things like you’ve been talking about. Well then, where does that money come from? I have to give the customer money back and I have to figure out how to run more efficiently to cover all those additional costs that are coming my way. • I think it’s that, and all the uncertainty around the election increases risk and the problem with having zero interest rates is you can’t price the risk. You’re trying to make money, you’re trying to understand, how am I going to get a return on whatever I invest in, and it’s just too much risk and your return just doesn’t seem to be there, so nobody invests; nobody goes to the stores at Christmas and buys stuff, and there’s no leader out there projecting a positive image about what’s happening in the economic world. Everybody wants to preach doom and gloom because that’s what allows them to come in with their answer, even if it’s not defined what that answer is. Changing the subject, one of the legacies of the 2008-09 recession is that supply chain relationships were less about relationships and more about price and terms and turnaround times. Is that your experience? • Absolutely. It’s been great for us. Being fast and flexible, it maybe limits our reach a little bit, although we’re going to the Middle East with some products because you have to have some intellectual property then, but it’s really hard when you’re that tight and that close, and short lead time and specialization to your customers, it’s really hard for someone to knock 192

you off. We’re seeing less competition coming in and being able to take the products that we do have. • We’re getting the feeling that you know the automotive industry people have fled the automotive area and they’re infiltrating the other OEMs and they’re bringing their styles with it, so it’s so successful for the automotive industry; now they’re bringing it to others and they’re putting the pressure on us and we have to look at VAVE and you know, cost downs and growth clauses and things that are horrible, but I mean, it’s just the way it is nowadays. • Price, and there’s no loyalty. You can talk to someone you’ve done work for over 60 years; they get a new purchasing director in there and you say, “we’ve been partners for 60 years” but they say I don’t know you, so it doesn’t mean anything. You’ve got to start all over again, they have no loyalty. • Takes a lot more work there to manage those situations. There is plenty of turnover when we buy, the purchasers that we’re supplying, but we try to keep enough depth of relationship among other players in the organizations so that it’s harder for a newcomer to just cut the line. It’s been to conform, you get the quality, you get the time and other things right and it makes it more difficult for that newcomer to come in with big changes. On the terms issue, I read an article recently, which I believe after reading it; there are people asking for the longer terms, it came out of the recession and as more people said okay, I’ll do that because they were worried about keeping their business during the recession. People are there saying oh, it worked, and more and more people would ask the question about extended terms. We’ve allowed some extended terms, but then on those particular terms, we just keep people’s feet closer to the fire than we might have on the looser terms. It seems to be working. It’s always been negotiable and for situations we confirm. • I heard a while back that the Minneapolis Fed president said that large companies are not willing to share the profits with their supply base anymore. Good luck to you for the most part and that makes it very difficult. We haven’t been, you know we’ve had minor pressure to reduce prices, but generally good luck trying to raise prices. Then when you got all of these compliance costs, your medical insurance goes up 15-20 percent a year, you know, unless you can get the sales growth that can help you to spread those costs out, it’s a race to the bottom. What I’ve determined as an informal strategic player, is you have to grow, whether you can do it organically, or you acquire companies, but the break even in the economies 193

of scale for the suppliers of our size anyway, we’ve got to keep moving up just because you can’t afford—since you can’t raise prices, and you can’t afford to not have insurance, et cetera, et cetera, you’re really forced to grow or die. What currently used to be considered a decent to large size company isn’t going to make it five years from now, you’d better be double where you are now the way things are heading.

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FOCUS GROUPS

St. Cloud March 3, 2016

Gray Plant Mooty

How was business last year? Did it go as you expected? • We’ve got 130 employees. We had planned sales growth last year by $2 million; we grew by four million, so we had planned on having a good year, and we had a great year. It’s our sector in the niche that we’re working in. If anything, we’re facing a little bit of head wind, with half of our sales shipped internationally. The strength of the dollar is not being our friend right now, but you know, we continue to, we’re doing well. • We had a good year; I think we grew 12-13 percent. We found that we took our manufacturing manager and turned him into a sales person, and that was the best thing we could’ve done. He goes out and answers technical questions for customers. He’s trusting, and he knows his business, so that was a good move. Our ice fishing product could have put us into an incredible year had we had ice in October and November, it would’ve been a lot of fun. As it was, we had a very good year. Right now things are going very well, and I think what we’re seeing is a combination of hard work on the sales side and a still fairly strong economy. • My business was down about 10 percent from what we thought. It was Sponsor: Gray Plant Mooty

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down about two percent from the previous year, but with that said, it was our second best year ever. We were hoping for it to be our best ever. 2014 was. • Well we had a tough year in 2015; we had grown 30 percent in 2013, and again in 2014 with the oil and gas industry. As they offered more opportunities, we were more than happy to jump in with three feet to chase them. 2015 came crashing down, so we had grown 30/30, and we probably shrank closer to 40 in 2015. Went from 200 employees to 110. It was a tough year, and now, with that not coming back, we’re scrambling to diversify the customer base. How about 2016? • It’ll be better than last year. Hopefully we won’t have a steel collapse, as bad as we did last year. I would say we’ll have a better 2016 than 2015, just because we hope with metals, we should firm up in June. It takes a lot of work. • I’m looking for 2016 to be a better year than what we had this year. We had our best year this year. A brief little history. We’re still not that big, but we were much smaller a few years back. We’ve nearly tripled in about a four or five-year period. 2013 to 2014 we had a 30 percent growth. That’s a lot of growth to sustain, and deal with. We had about a five percent growth from last year to this year, and the government funding the Fast Act Bill. I don’t know if you’re familiar with that. Our work has allowed the infrastructure to install roads. A lot of states are getting funded money. That is definitely helping in moving it forward. I expect it’ll be better. Is there a lot of uncertainty in the marketplace? • For our company, it feels to me there’s a lot of economic uncertainty out there, but we don’t feel that our markets, actually the education market appears to be pretty darn healthy. We thrive on construction happening in the industry. In that segment. The education and construction businesses are really healthy, and it looks like we’ve probably got a couple years of that ahead of us. I think we stare at 2016 and 2017 and say we should have some good years in sales. • We look for a good year again this year. We had a good year last year, and biggest change to support that, I guess, is the USA requirements in our product. A lot of these jobs are requiring USA port castings, and so that drives more to us, because we do it all here. We do all the commissioning in-house.

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Anyone here rely on agriculture? A challenge? • A little bit. Last year we were down in the ag market. We weren’t down as much as we thought it was going to be, but that’s just motivating us to get in front of the customer more. Doing more visits, and getting in front of them a lot more. How about energy? • We’re in the energy market. We were doing a fair amount of nuclear business, and a lot of things have affected that. Fukushima affected it. Low price on natural gas affected that, and lower energy demand affected it. When we first conducted the State of Manufacturing® focus groups, the economy had gone off the cliff, and no one saw it coming. Do you wonder if there’s that potential in this economy? Does it affect your planning? • Definitely. Just making sure before you spend the dollar that you’re asking a lot more questions. Is it sustainable? Does it make sense? We’ve thought about expanding in the Southeast with a manufacturing plant, but we have to fill this one up first. The other challenge in filling this building up first, is finding people who will work on third shift. Weekend supervisors, so it’s kind of a Catch-22. Ideally we’d like to get to a 24/5 kind of an environment. Take some business out. Move it to the Southeast. Expand, and so on. To your point, I think those days and those memories just make it harder to pull the trigger. • Debt’s pretty cheap, but sustainability I think would concern me the most on the business. • I guess I would echo that. My job is to get out and talk to a lot of the businesses. Especially manufacturers in this field. It just seems rather sluggish the last couple of years. There’s growth potential there, but they’re very conscious about the proceedings. They’re reusing their plant because there are many out there for the debt side. There seems to be just a real cautiousness, and a lot of businesses, just because of the talent, I think, which is no surprise to anybody. It’s just we can’t fill orders because they can’t produce what they need. • I’ll give it to you from an advisor’s standpoint who has conducted a lot of financial funerals with businesses that didn’t make it. Right now I’ve had two calls from clients that have been called on by Bank of America. As probably most of you know they’ve established a beachhead in Minneapolis, and they’ve got runners out calling on people. Initially they’re going after car dealers. They will guarantee a seven year fixed 197

rate loan at 1.8 to two percent. As you know, that’s way under the market. That’s two percent under the market, at least. That’s an indication of the lack of demand for cash, and all of the cash that’s floating around in the economy that’s going without a home. Everybody is tentative, I think, on hold, because of the uncertainty of the world markets, like you’ve just all talked about. Those of you who work in foreign markets, you can’t sell into the other markets. I represented (company) in Canada. He was just down last week and shut the plant down. They can’t afford to manufacture in the United States and sell back into Canada. That’s one area, because of our strong dollar. I personally do a lot of work with the ag industry. (Company) has bought all of the potato processing plants in the United States. They’re out of Canada. They cannot afford to pay American producers to grow potatoes for them. They’re moving their potato production back into Canada. The American potato growers all suffered last year because of the ports being closed with the strike in the Pacific. Now, Canada is taking that production, so all our French fries that were going to the orient are now going out of Canada, and they’re being grown in Canada. All the people who grow potatoes here along the Mississippi are trying to figure out what to do. They’re not getting contracts from (company) anymore. These things are having a ripple effect. I keep asking myself how the United States can avoid a recession when the rest of the world is in a recession. I think we’re all scared, quite honestly. • I think that’s why there’s so much hesitance, like he said. We’re tentative about our expansion, because we’ve just been reminded of what can happen. I think people are much more apt to expand out of their own dollars, now, and even, I’m probably the most liberal advisor in this whole office, and even I’m ratcheting down my debt to equity ratios in all of my internal thinking, simply because that’s the one thing we’ve learned. I tell all of our clients, this is what my dad told me back on the farm. “Don’t buy something unless you’re sure you can afford it, unless you’re sure you can pay for it.” I think we’re all adjusting our appetite for debt. We know that if we own something with a low amount of debt on it, we can get through a severe recession. If we don’t. We can’t. Nothing else matters. • Leverage used to be a beautiful thing. It doesn’t look the same. It used to be a lot prettier 10 years ago than it is now. It’s just not so beautiful anymore. • I did want to say that last thing. Every builder. Right now schools are the big thing. Every building contractor is limited in their ability to grow by their ability to hire people.

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We’re in a volatile market and we’re still chasing after qualified workers. Is the skills gap still a big deal to you? • Not so much in our business. We’re a very light industrial business. Our skills gap is maybe more so on the professional end. We don’t see that same thing as you hear about. • It seems like a lot of our employees want to just start in management. We just interviewed someone that’s working in our shipping department after two or three months, and his resume keeps having him move every three months, but he thinks everything he does is beneath him. My sales guy said, “Good thing you weren’t in there. You probably would have fired him for what he said.” Just tasks were beneath him, and he should be promoted by now. It’s just a different mindset. Not one that I ever had, but pay me now, I’ll prove it later, or why am I not promoted yet? What we had to do is really outline a path to success for these younger people coming in saying you can get there, and here’s your path. Being more proactive about it, and outlining it. I’m proud to say that we’re getting more people now because they’re being referred by people who work there. That probably makes me the most proud, because when I started we had a bad name about how hard it was to work there, and that you shouldn’t. I think the last four or five people we have, we pay a couple hundred dollars for a referral fee if they’re still there. That’s where we’ve had our most luck so far. I think the biggest challenge is in finding people who want to work night shift. Not have to, and how fast can I get off of night shift, and fill in behind him. Every day is a new day for the poor supervisors or manager—“Who’s going to show up?” No call, no shows, and shutting machines down because we need a team of four, and we have two. Now let’s shut that down. Bring these people over. Why do I have to work with Johnny? It’s just a new ball game, and trying to find those people, which is a good thing to have in your drawing. It’s a good problem to have, but it’s a legitimate problem. • I agree. The work ethic is of my generation. Not of yours. It’s terrible, for the most part. They have a sense of entitlement. They went to school, but they think they’re going to come out and make what maybe some people that have been in it for 10, 15 years, and they want to start at the top and learn as they go. They don’t want to earn their way. That’s hard for business owners, or anybody to hire them, expect that, or try that. It’s frustrating. • I have a teenage kid and kids in school. Even in school. It’s now the end of the trimester, and he’s got missing assignments, like no big deal. Any time you turn them in you get full credit for them. You’re setting these kids 199

up for failure. Let them fail. If they’re going to fail, let some people fail a little bit. It’s just too easy to think. • No child left behind. • Yeah. Some experts predict that the skills gap won’t go away no matter how well we market manufacturing careers to school-aged children. There just won’t be enough of them. They say the way to address employee issues is by retaining the employees you have and making them more productive through things like the new ISO guidelines. What do you think about that? • We just completed ISO a couple years ago. Two rationales behind it. First, we had this training gap. I have a lot of people in my company who worked for me 30, 35 years. They’re going to start to retire. We had this training core gap. We looked at it and it was like, we don’t have manuals that are clear and precise. We haven’t reviewed them for a long time. We brought the ISO process in to actually create this platform for training the next generation. It’s worked really well. It has gotten so many people talking. Everybody’s doing it the same way. It was a process, but we did it for them. We have all this retirement coming. We have all this growth that we want to do. We had to have a core training base. We now have, the thing about millennial is that they always want to be challenged. What’s next? What’s next? We’ve actually formalized training for employees. Day one they’re trained on this. We just keep training on training and training, so they’re never stopping learning. We’re out of farm boys. We don’t have farm boys who have a mechanical aptitude anymore. We’ve got to train these people. • I have a hard time finding people to implement ISO. That is a big investment. • It drives labor. I know that ISO is what it is, but it’s different potentially than continuous improvement and automation, and smart manufacturing. My customers don’t demand that I have it, but at the same time, for the amount of money it would cost me to get ISO certified, and the type of people required to do that, and train, it’s an investment, and I’m not so sure it’s that high up on my list, because I know what it took in other companies that ran ISO. It’s a major investment and it’s sometimes hard to manage the return on investment. We ended up on the other side where people got so, handcuffed in it, and stopped our manufacturing process because we weren’t following the rules. That was hard sometimes to get back into 200

entrepreneurial, get the product out the door. There are some dangers going the other extreme, too. I understand why you did it, and you have to have formal processes and procedures, but does that need to be ISO? And are you getting ISO for the right reasons? And so on. I’d have a hard time finding a person who would implement that, and the amount of time that would be invested, and money. Already thin resources to make that happen. Has anybody implemented formal, internal leadership training to try to make sure that you develop and keep the people? • We recently brought on board a VP of HR who came from the automotive parts industry. He’s been running every one of our managers and supervisors through some level of training, and how to interact with millennials, or how to have a clear, open conversation with an employee who isn’t performing, that sort of thing. We’re a couple of months into it. The employees, the supervisors, and managers seem to appreciate it. Foreign competition is frequently mentioned as a challenge by manufacturers, with changing intensity over the years. Where is it on your radar today? • A lot of stuff we make is fairly technical, and we’ve been told for years that they were very, very tight on who could make this, that, or the other thing. Now with the oil and gas business dragging down, they’ve reached out to the other ends of the earth to get parts made. With the strength of the dollar we’re seeing competition from Great Britain, and Germany, and of course Romania, Poland, and the Czech Republic. Southeast Asia has come on board. That business wasn’t there before, and it’s moved there. • We’re not seeing the global market so much with our products, but with the parts. Components and stuff for what we make, even ourselves now, we’re finding people to help us get the Chinese sources, and looking at stuff like that just to compete, because of the competitors that are selling chain, for example, at so far below what we get it for for cost. It’s ridiculous. It’s obvious what they’re doing, yet the quality, from what I’m hearing. I don’t know. I’m not experienced enough overseas, but just like here. You can get good, great stuff. Same thing overseas. It’s your contacts, and that kind of thing. You can get quality product over there. How do you respond to that? • By joining them. We’re going global with some of our replacement parts. Buying it there and bringing it in. Really you don’t have to buy the mass quantity things you would have to. • The last time I was in China we spent three weeks touring steel mills, 201

and more than one steel mill I had the manufacturing mill rep say, “What do you want your heat certifications to say?” I said, “I want them to tell me that the grade is in there.” “No, no. What do you want me to say? We’ll just make them say whatever you want.” It was like, “Excuse me?” Done. Not going there. That’s the kind of environment it was. It was unbelievable, “What do you want them to say. Make them say anything.” We’ve had a number of steel failures in the U.S. from foreign product. There have been a lot of failures like that. I was asked by more than one mill, “What do you want your certification paper to say?” • They think it’s good customer service. • Absolutely. They’ll just make it say whatever. There are risks in going overseas. You have to be so careful. • Do they expect you to service the warranty claims? • We don’t buy Chinese steel. We had the opportunity. This was actually a domestic association that took us there. When we were over there we had domestic mills sitting in the conference room next to us negotiating with the Chinese. The risks that were coming through now are with China having such excess steel capacity. They’re shipping billets now. What you’re going to see, is you’re going to see Chinese melted product getting rolled into domestic product, and you’re going to have the same issue there, because they’re not going to trace back to where it came from and whether it was good quality at that point, because they’re just going to be rolling it. What’s the solution to that? • There really isn’t a solution to it, because China has always been a trader. They’ve always been a great trading nation. They know how to do it. They have all our dollars. They’ve got all the money in the world. Yes, I think their economy is going to be in serious trouble because the last time I was there there were whole cities that were built for hundreds of thousands of people, and there was nobody in them. There were apartment buildings poured on top of rice patties without footing. They just started pouring concrete. It’s like, this place is going to fall down. It’s unbelievable. Could a collapse of China bring things down domestically? • Depending on whether or not they’re going to spend their money to keep the people in a job. That’s the only thing that keeps that government going, it is by keeping their people employed. • For the U.S., they’re 7/10ths of one percent of our economy, and they 202

are not, in theory, shouldn’t be the black swan, I guess. • How much economy do they support, globally, besides the U.S.? • That’s a great question. I don’t know, but I know they’re a very small, tiny piece of our economy in the U.S. Another issue that emerged during the recession was more demanding supply chain relationships. Is price becoming more and more important, at the expense of relationships? • Definitely. I’ve seen the price issue on a lot of fronts. At the expense of relationships? • I don’t see it like we used to see it. I see a lot more standoffish. We’ve gotten letters from (company) in Houston that literally tell us not to come down. It’s a general letter of the suppliers. We’ll call you if we need you. We know where you are. Don’t bother. • I think stocking has been the other thing too, with space. We’ll give you a PO, but if we don’t want it when you’re done with it, hold on to it. We make big parts, so that’s not very much fun. Then you’re only as good as their planning methods too, so if you get a customer that’s not very good at scheduling, or they’re going through trouble, it just trickles down. Even though resin prices have gone down. I’ve been pleasantly surprised, knock on wood, we’re not getting as much pressure. It’s more about due dates and working with them on holding product if they don’t want it, or wanting us to have a warehouse across the street to be able just to pull from it. I think that’s even getting to be more and more than ... obviously you’ve got to be competitive, but stocking for people, and being able to get it to them in a day is probably just as important right now for us. Another issue: What about the cost of supplying your employees with healthcare insurance. How has that evolved as a source of pain or heartburn for you? • It’s a huge expense. • More plans. We have a lot of single, 23-year old guys who have never gone to the doctor, so we just offer a very narrow plan. If you never use it, fine. If you use it ... then we’ve got the other extreme. We’re just tearing apart our healthcare plan to offer four or five different programs for the four or five different groups, and HSAs, and contributions. To me, we’ve had to have health care partners that were very creative, and allies too. We know who’s using it, and how to serve those people with the right premiums and 203

deductibles. • We joined a PEO this year, a Professional Employment Organization, to be able to provide a decent plan to our employees. Until this year we had a reimbursement plan for medical insurance, so people would go out into the individual market, and we would reimburse up to 75 percent of the cost, depending on what they got, and so on. That was very economical for the employee, and economical for us. Through the ACA that became not an option anymore, and so we had to, with our history, 71 employees. We’ve had a couple who have had cancer. We’ve had a couple transplants. Our medical insurance, if we had just gotten our own medical insurance, single rates, were going to be eight hundred and some dollars a month, or something like that. We ended up going with this other plan. To your point, now we know how much we’re going to pay for the next three years for medical insurance. That side of it is, we’ve been able to identify how much we’ll pay, but it’s an enormous expense that we didn’t have previously. Are employees more savvy consumers of health care? Do they understand and appreciate the benefit more than they used to? • Not at our company. • No, I think people just have an expectation that they’re going to get covered. I think the Affordable Care Act doesn’t take effect until 2016; for us the volatility of the last two years, I think we’ve been changing plans. We’re proud of that. We had something for an extended period of time. Now it’s like, each year some new regulation came up, and I don’t handle it, so I don’t know the specifics, but all the sudden, the rate that we got for that year, that is no longer being offered, so we’ve got to try to find something that’s compatible and affordable. Otherwise you do hear the complaining and the moaning and groaning. I don’t know much about it. • I think there’s more of an awareness of insurance costs, and analyze the plans, but the analysis has to happen at the, how much am I paying for my MRI? Until we get to that point, I think we’re heading in that direction, where you’ll see those variations, because healthcare I think, in general would tell you, it could be self-healthcare as well, would tell you they’re feeling that pressure of the difference between a $1,000 and a $2,000 procedure, for the same procedure is starting to become public knowledge. As that happens that’s going to take knowing that industry in a big way. The consumer is still just buying insurance. They’re really not becoming healthcare cost conscious. Do they still consider comp and benefits a separate thing? It used to be 204

that people would just say, “That’s benefits. That’s not my pay.” • That’s an interesting question. I don’t know. I would tell you I think in our company there’s almost some sticker shock that’s taken place over the last few years of holy moly does this cost a lot of money. As a company, quite frankly it’s borne by the employee. You just only have so much to spend. I think employees are feeling that more than ever. Wow this is a big chunk of my expense each year. I don’t know where that leads, and what all consumers learn from that. I know that certainly our employees really feel that when it comes to what they spend on healthcare each year. That has grown a lot in the last five years. What about compensation. Is there a cross pressure to raise salaries? • We’re increasing the hourly rate for our production workers so that we stay a couple dollars ahead of the Minnesota state minimum, so that at the bottom we want to be a little bit a head. As far as the employees who are coming in, we’ve had a pretty mature work force. They tend to stay for a long time. The new folks who are coming into production areas. They’re coming in thinking that they’ve got the answers. Reiterating what you said, it’s a challenge with the new folks. How much of a factor are elections in planning for your business? • It’s very worrisome. If you want to talk about trade. We’re sitting here talking about China. Who are we going to be able to trade with? How’s that going to work? I bring a lot from China, and I just think there’s such a difference between what’s going on in the elections and the vision, that’s a huge walk. You’re talking about healthcare, trading partners, tax, regulations, and it’ll be an interesting time to run a business and see how that may or may not affect it. It definitely has come into play. It’s a big question. Don’t you think? Obviously this is a separate four-hour dialogue. • I think for us, because we’re reliant on education and healthcare for the short term, the next two to maybe three years, whatever happens isn’t going to affect how much is spent in education or healthcare right now. In three or four, or eight years, it will. Looking at the long term for us, it will probably have a, could have a big impact on us in the long term, but in the next two to three years I don’t think it’ll affect us. • People will see economic impact when I was at the water cooler, because we were spending a lot of time there ... • I don’t think you can run your business out of fear. You’ve just got to pull ahead and you’ll have to operate like everybody else, but I don’t think you can paralyze it. That’s for sure. 205

• We always talk about that. I’m probably getting ahead of myself, but I’ve never paid any attention to elections. I’ve just never seen that as a factor in making a business decision. • It isn’t like Washington’s been a well oiled machine. • It’s just the breakdown after that. Where is the funding going to be going afterwards? We do a lot of the big municipalities, and the funding is there. Who’s in office could make a difference in our future.

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FOCUS GROUPS

Mankato March 7, 2016

South Central College

Since we are at a school here, let’s start by talking about the skills gap that’s occupied everyone’s attention so much over the last few years. Is the skills gap still as much of a challenge? • I think it’s still a challenge. We have several roles that we are trying to fill in all levels of the manufacturing operation. We can’t find people who have a fundamental concept of manufacturing coming in and being able to train them to operate equipment. Welding skills for example. But also on the professional end we’re trying to find marketing people, sales people, and trying to find new skill sets in the area is sometimes a challenge also. • I’m interested in marketing people. Right now we’re looking for probably associate marketing people. People who are coming into their career, probably have a few years experience and willing to grow through our business. • We are struggling. The low unemployment is a challenge. We have machines that we need to run, and we’re really having to put intense training into people that probably, in a typical environment, would probably not be moving as fast where you have time to layer in different Sponsor: Southern Minnesota Initiative Foundation

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positions with their machines. It’s been a challenge for us for a number of years. Just getting the right people and the right training, people who can handle our different machines, and different operators. • We’ve had to do all internal training for basic technical skills from machine operation and now we’ve layered on lean manufacturing and that’s a concept that we’ve had to teach from basic. From scratch. Our employee base wasn’t familiar with it, didn’t have any kind of experience with it. We’ve had to implement programs to educate our staff. And they’re receptive and open and excited to learn it, we’ve found a very receptive audience in our employees. And those who aren’t, they move on, interestingly. So turnover is a challenge in unskilled labor for us. And we’re trying to skill up our laborers so that they feel like they gained something and are committed and interested in more than just popping popcorn. We’re trying to help them develop their career while they’re with us. • I was just going to say, if we were hiring it still probably would take us six weeks at least to find a welder. That’s probably up to 180 days before they are truly a welder at the skill level that we look for. I want to go back to the welder thing. I’ve heard that a company had just shut down and they had 25 welders. Ten days later all of them were employed someplace else. • Educator: From the school standpoint it’s looking better. I think our enrollments in that area are getting better. Both sides of it, companies are now saying, “Can you come in and help us get our welders certified or teach them new skills?” Because they’ve been farming out all their maintenance welding on stainless steel to other places, which as you all know is never on your timeline and it’s always more costly. We’re trying to do that. We’re also running some welding clinics for incumbent workers to get them AWS certified. But I think enrollment in our welding programs on both campuses is actually pretty good. It’s better than it’s been in years. • And I was just going to mention about the distribution centers and one of the effects that it’s having on us as a school is that of course they are a refrigeration center and so they’re unfortunately hiring some of our HVAC students before they’re done. So we’re meeting with them to talk about the potential of putting an apprenticeship program in place so that those students can remain with their goal to get a degree and also have that work environment where they can earn dollars. Some people say the future skills gap will be increasingly due to demographics. There just won’t be enough people due to declining 208

populations. What do you think? • I think the solution is embracing the immigrant community too. If companies aren’t going to do that, they’re going to be left behind in the next five to 10 years. And we are really working hard on opening our doors and providing opportunity for many of the immigrants who are just driven and want to be part of our community. So a huge opportunity there for all of our businesses, I think, and for the school. • It frustrates me sometimes. I stand out in the hall and we have all these immigrant students who are waiting to get into nursing. And sometimes they’re waiting a year to get in the nursing program. I don’t go grab them and say, “Have you ever thought about running a machine or welding?” • Part of that is going into their community and helping them see opportunities. We have just been fortunate that we’ve had employees who have spread the word and have brought family and friends to our business and they have been incredible employees to us. • With that came challenges that we needed to understand, so there is a different process in place. You’ve got to meet with the leadership of the community, to sit down and discuss safety issues, clothing issues, prayer issues, and to make accommodations so that the line can keep running and yet they can honor their faith. We’ve been able to do that and retain some very, very good employees. But it was new learning for us, for sure. • I think it’s just acceptance in showing the community that we want them to be a part of our company is huge. Because we know we need them and it’s giving many of the immigrant community members an opportunity to see, “Wow, there is an opportunity for my family and me” to be a part of something that they weren’t familiar with. • We have found that word of mouth is sometimes the only way to get through to the individuals and their specific community. And many of the people, they want to achieve this, but they don’t have access to email. So again, it’s families talking to other families to spread the word on that. And also on the DEED information with the essential population of rural Minnesota declining over the past few years, the immigrant population is skyrocketing. And I totally agree that these people truly want to have an impact, and truly want to achieve specific goals. And you can provide an inclusive community or an inclusive workforce; it makes all the difference in the world. • There are two organizations that are working hard with the immigrant 209

community. The YWCA is one organization that works very closely with the immigrant community. And then also the Adult Basic Education. They are the ones who offer the citizenship courses and they really work hand in hand with the immigrant community as well. What about other solutions to the skills gap, like retaining existing employees and making your operation more productive? Is that part of a formal process at your companies? • We’re very focused on operational excellence and automating as many processes as we can. Certainly we are ISO certified and run our business accordingly with processes and things and continue to look for ways to improve processes, embrace technology. There’s no doubt that most of us will have to use some sort of automation and technology to take the place of some manual labor positions that used to exist. • But there’s a cost. It’s hard to pull the trigger on automation like that, so it’s a balancing act. At times you have a flow of people coming in, a solid workforce base that you have, and then all of a sudden something happens and you lose that a little bit and people go somewhere else. We made the decision to really tighten up and go lean rather than automate just because the automation was very expensive to do. And in our eyes at this point it wasn’t worth going that route. But it’s becoming more and more difficult to secure the employee base that you’re looking for. You may have to make some decisions that way. • We do have automation in the plant but it’s part of the core of what we do. And we’ve used technology on the floor to create feedback loops for our folks on the floor so that they understand and know how they’re doing, every hour. So that technology is used to give them information as they’re working, and then they can respond in real-time. Believe me, we have an engineered process on the floor but we just added this feedback loop directly because instead of waiting until the end of the day, they get immediate feedback of how they’re doing. And that was a new initiative for us and we understood our people on the floor needed more information because they really wanted to do better. They really wanted to be an excellent employee and we had to figure out how to give them the tools to do that so they could make decisions in the moment. That required us to bring in some technology to help them. So we have computer screens on machines now that we never had before that give them their data. And then we had to teach how to interpret that data. And so they’re gaining some critical thinking skills as well on the floor and they’re open and interested. You just never know how receptive people will be to change and I think we’re surprised by how successful it’s becoming. It’s incremental learning. 210

For us, it’s always about seeing that person as more than just doing their job on the floor. We’ve got to give them back something, and recognize that they are more than just the machine operator. So if we can contribute to their learning and their life, that is sort of how we approached it. We just feel like we are in that place. It really depends where the maturity of your business is. We’re fairly new. Relatively new. And so we’re becoming a little bit more mature and able to understand manufacturing a little better. So it depends on how mature your system is. I’d say we were an adolescent system and we were kind of wild and crazy for a while, and we were just kind of coming into our own. And I think that is reflective in our work force too. They come along for the ride and have helped us kind of get through some bumps. It’s always been very important for us to feel like we’re all in partnership together. (Name) and I have always said the most important people in our business are the ones who are actually making the product. Because if that doesn’t work then we don’t have a business. • I think one of the things that we deal with in our business is critical thinking. But we struggle a lot with not only the critical thinking, but the soft skills: showing up on time, staying consistent with what the business needs are. The other part we had to do, we kind of made a bit of a joke of being a second-chance business and we’re bringing in people who need those second chances. We couldn’t find a mechanic anywhere. We reached out to the colleges and every second year student within the first week of being in their second year program. We couldn’t hire. And so we reached out to someone who had issues, major issues, and helped him get cleaned up. He’s good at what he does, we just had to help get through the process of coming back shall we say. And now we have a really great employee. It worked. I think that’s a really important part. How was business in 2015? Any surprises? • We’re still seeing growth. • It goes back to the discussion on lean as we’re seeing growth but our core market is a standard product that we’ve been driving. So we’re looking to really improve those processes but our growth areas are going to be custom products. So it’s really trying, how do we shift our workforce internally so we’re running very lean on the standard product and the customized product, but when that market grows, we’ll shift that workforce which requires more skills? So that’s where we are going to see a lot of our growth. • A lot of our business is based on educational spending. So as you’re seeing referendums get passed, then schools are able to spend more money 211

on things that we would supply. Also we’re in the performing arts market so you’re seeing more spending on performing arts venues. So we’re outfitting those venues. Those areas are growing as the economy picks up and people finding they want to start spending in those areas. What about 2016? • Pretty flat. We contracted in 2015 and probably will stay about the same for 2016. • Very competitive for us. I think there’s opportunity to continue to diversify but the last couple of years have really been challenging for us in terms of competing in the national and even some international markets. Prices and commodities have been great. • But even in that competitive environment there’s growth. In natural organic foods that’s where there is growth in our sector. • I think with our clients we haven’t really noticed a slowdown in capital expenditure investments. I think there is a lot more discussion though, about some of the things they’re seeing in the broader economy with the slowdown and oil and gas and the downturn in that economy. Certainly North Dakota and Texas are feeling that. There are clients up and down the supply chain in those states feeling it. There’s more discussion about just some of the uncertainties I think in Asia as well; there was some slippage in oil markets right after the first of the year. I think generally, though, even though these things are out there, we still haven’t seen a slowdown with investments in technology and investments and other things that can help improve their business and our consulting business. So we’re still seeing clients continue to invest even with those things happening. My question for you as a group though is, in attracting employees, how important are the health benefits to you guys? • Extremely important. • Huge. • Huge. • In what sense? Just as a way to get people in the door? • Because there’s two percent unemployment... • So we have our manufacturing plant which is here in Mankato but 212

then we’re hiring a high level SVP of marketing and sales and they’re all over the country, and we have an office in Minneapolis, and high level professionals. They don’t even look at you if you don’t have your 401(k) and you don’t have a complex benefit package. They require a lot and ask a lot more even than our manufacturing folks. But our manufacturing employees have benefited from the programs that we’ve put into place. So to retain a sales staff that lives across the country from New York to L.A., that was an absolute minimum standard, that we have a program that provides health care. • This is different probably than others because we are younger, and when the recession hit we doubled down and everyone pulled back and we went forward just because we took some chances. Smaller companies like us, we’re just kind of always pushing. That’s why there’s a need for a continued employee base of qualified people, especially machine operating people, technology based, that we’re looking for so we can continue to do that. Do you feel like you have a healthcare plan that is enticing? • I’ve got a small company, we’ve got 11 or 12 people. But over this last year I hear the employees talking about their health plan that they have. Last year we were paying for half of the cost. Now I’ve got key people who are talking about getting part time jobs just so that they can afford to pay for their health care. So this year after hearing that I went all in. I’ll pay for your entire full health. • Wow. • I got a really good reaction out of everybody. But I feel I have to do that; I can’t afford it, and that’s why I really need to be out there pounding the pavement and all that to bring in the extra work for that. I feel that where we’re located out in Green Isle, I see 7,500 hundred cars driving into Minneapolis every time I’m going out to work. I’m thinking out of all of those cars there have got to be a few people that I can snag if they knew about us and our health benefits. Have you seen a recruiting benefit? • Recruiting wasn’t the issue. The newest employee has been with us just about a year now. Our average tenure has been about 13, 14 years. So when I get an employee they stay put. And I really feel the only way I can compete out in my area is to offer something that they might not get somewhere else.

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How has government involvement in health insurance affected your business? • Well, that’s a loaded question. The government involvement has hurt us for sure. • We went from having a mutually beneficial benefit program to one that is still fairly competitive and beneficial to the employees, but very expensive for our company now. We try to do as much as we can, like (name) is doing, to keep a low impact on the employees but it has an impact on them, for sure. But the type of benefit program that we had and still have, has become more expensive for the employee as well because a lot of what we do is now taxable to them where it was pre-tax before, unfortunately. • Closest compliance is definitely the added pressure of having to manage it even more than we had before so there’s additional administrative pressure. In terms of price we’ve been fortunate enough in the last year, we went out in the market and have seen some pretty favorable improvements and we actually didn’t have to do an increase this year for our employees, so that was nice. But that’s probably short lived, I would guess. Another issue: supply chain relationships. They seemed to get more demanding during the down economy. Has that changed? • There’s been a definite swing, I would say, toward performance. So quality and delivery have again gained strength over just purely price. So I find that really positive. • Well for the first time, we built a logistics team in the past year and a half. Before, we didn’t even know what that was honestly. We had somebody scrambling to get this year in there. Internally we saw it as an opportunity for us to manage our vendors. That moved to Minneapolis actually. We were able to gain a lot of talent out of the General Mills and Target lay offs. So we benefited from their supply chain expertise and we just brought over and created an entire team. We’ve been able to get cost savings and, I would also say, expertise that we didn’t have before. That was the same thing that sort of happened to us in 2008 in manufacturing. When people were laying off, we absorbed a lot of those staff. So we’ve benefited on the positive end of the shifts in the market place. What about the challenge of shipping product in general? Is it something that you think about much? • Absolutely, we had contracts with shippers or logistics companies and they couldn’t get enough truck drivers to show up at a dock door for us. 214

They just couldn’t deliver on their services because of the lack of drivers. What that caused us to do is put out an RFP and work with a national trucking company that had the resources to deliver. • And you still have surcharges and things in place right now. • Yes. • And you know that those surcharges are part of absorbing the cost for them of keeping and retaining drivers. • Right. • When you should see all those surcharges and things go down with the price of gas and diesel going down, those surcharges have remained in place and they refuse to negotiate on those right now. My suspicion has been that it’s just because of the cost of their employees. • Well it’s a two pronged sword in that lack of drivers, what that does is push the edge of the envelope as far as the amount of hours the driver can run. Which also means you’re paying time and a half. You’re getting to a point where you’re running that driver right up and some drivers want to do 40 hours. If they don’t like it they’re going to go find someplace else to work that is only a 40-hour job; others depend on that overtime. I swear, for the four years I’ve handled truck drivers, my mantra, to my manager, is, “Cut the overtime you can hire another driver.” And he says, “If I could find another driver. Yeah, the overtime is killing us, but I’ve got to keep product moving.” As I said, our business is two pronged; we bring product in and product out, so truck driving is a big part of it. The other part is managing the trucking part of it because the state of Minnesota and the Feds have upped the amount of paperwork you need to do. By 2017 we are required to have all electronic log books. There’s a cost for that, so that cost is going to trickle down to everybody who uses those trucks. It is a big issue and, of course as a country, we chose many years ago to pull up tracks and push everything to the road system. It’s what we need to do and what we need to use, but on the other end we need to keep truck drivers moving. The population of truck drivers who are going to be aging out within the next five years could scare you. • And yet the truck driving schools, just like the nursing schools, only take so many. • Educator: Well we’ve looked at it. We’ve spent extensive time here 215

at South Central and we’ve been very close to opening a truck driving program here at the campus. Which wouldn’t be that hard to do. The problem that we’ve found from other colleges with those programs is getting people who want that as a profession. It’s just really hard to recruit people into it. • Maybe it’s a factor of that when they do get in the truck. I always heard from drivers, “They’re always pushing me to drive more hours.” It’s a different lifestyle, you have to kind of want to have that type of lifestyle. • Our business is home every night. It’s normally five a.m. because we work in the animal agriculture industry. We start moving at five o’clock, four o’clock in the morning to get where we need to go because we cover most of Minnesota, northern Iowa, and Wisconsin. So it takes a couple hours to get where we need to go so they’re starting at four or five o’clock in the morning but they may be done at four o’clock in the afternoon too. It just kind of depends. At the end of the day, they’re home every day. Some of the drivers who could make a few more cents or a few more dollars going over the road will choose us just because they want to be home with their families. So the drivers we have are wonderful. I can’t say a bad thing about any of our drivers. It is tough to keep filling that slot. I swear every time I turn around my manager is saying, “Well, we bought another truck and I’d like to add a driver but I can’t get a driver.” It just seems like it’s an ongoing issue. • So this is where we have former employees, immigrants, one who is now driving truck and his dream is to own his own truck, to start his own business. If you could create a program that helps someone realize their own business, a small business start. It’s about not financing but helping them get access to their own equipment. He is driven; there are people out there who want to do something like this but they want to start their own business doing it. And it’s a great opportunity for that to happen. Also if you start a program, you could also give them an understanding of basic business principles so that they can start their own business. • I would really investigate that because I think, talking to our friend (name), he said it’s just becoming a growing profession for many of the immigrants.

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FOCUS GROUPS

Rochester March 7, 2016

Rochester Area Chamber of Commerce

Did your company perform the way you expected it to in 2015? • It really did. We always touch base with most of our customers toward the end of the year just to get their perspective on the upcoming year. All of them stated that it could be one of their best years. Four of our top customers, it was their best year and they’ve been around not just a short period of time. Some of them have been around 20, 30 years, or so. A combination of everything so pricing is down on a lot of materials and that helps, too. • We were down a little bit because of the ag industry, the three dollar corn on the bottom feed, so a fair amount in the area in the industry. Farmers weren’t selling quite as much either the last couple years or so. We expect a better year this year. • I’m expecting this to go up. Our customers we have been around a while. There are a couple of younger ones but most of them are looking at a better year. Last year did go the way I thought. I thought we were going to have more sales than we did but then factors held that down but we did get more proficient with better equipment and the production supervisor Sponsor: Southern Minnesota Initiative Foundation

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has been leaning things up too, so that was good for last year. • We’re looking for improvement. See, the sales are kind of flat, but we’ve added new capabilities and added new equipment, which hopefully will expand our sales. Our industry is kind of ever changing in the printing industry and when things get tighter, people reduce their advertising. They reduce their advertising, our sales kind of dip until things start looking a little better, and then they release their marketing budget. • Printing has been evolving so rapidly in the last 10 years or so. I guess the ones who are still here have gotten pretty adept at finding new markets and doing new things, I suspect. • I think you have to. It’s a capital intensive business and the equipment is not inexpensive. What about your customers? How are they feeling? • My customers in the cut-and-sew and the consumer end of it are actually embracing American made. More consumers are looking for American products for clothing and their handbags and things. They seem to be really running with it. We’re growing and we’re pretty new. We’re about two years out now and they’ve gotten faith in us. We’re talking about capital expenditures. We’re actually reformatting ourselves where we’re having a cut and sew at home program so people are able to sew at home. We don’t have to buy the equipment and things like that. We’re doing a number of different things to really embrace the growth and be part of it. • There are many businesses that have light optimism right now. Interest rates are still low and their margins gets squeezed a little bit, which is an optimism about demand increasing so I think that’s a positive. The election cycle creates some uneasiness and certainly there are some concerns and doubts about what the future holds or interest rates. I think most businesses are trying to make sure that their interest rates are fixed because of the uncertainty of rise in our environment. From that standpoint, we do a lot commercial lending but we do a lot of ag lending as well and the ag side, certainly that business is stressed. Low commodity prices are really hurting and most producers are operating at below break-even so they’re entering 2016 wondering how much they’re going to lose. Not how much they’re going to make but how can they reduce and then monitor their losses and then that’s another concern. Certainly, that flows into the supporting industries for ag. Your John Deere’s, Case International, Cooperatives and all those kind of entities will suffer a little bit because the farmers aren’t in the position to do what they’ve done before. In the Rochester market, 218

the real, real positive is commercial real estate. Right now, it’s growing greatly. If you drive around the city, you will see significant amount of construction going on for apartment buildings. There have certainly been some construction hotels. When we talk about economic uncertainty, did the recession of 200809 have any impact on the way you plan today? • 2008-2009 was really hard. Before that, people would order 5,000 brochures of something and have them on hand. What really changed is after that recession, they were ordering 2,500 brochures and then if they ran out, they order 2,500 more or if they want to make a change, so it went from longer runs in the printing industry to shorter turnaround time, which in turn also affected revenue a little bit because they weren’t ordering these big runs. For us, I would say that we kind of shrank our work for us, trying to be a little leaner, trying to be a little more efficient, and we just try to pare down as much as we could. • Just in reference to all of that, and again trying to change our capabilities a little and looking for other opportunities that didn’t exist before. • We’ve done that too by starting a sew-at-home program but the other thing that I’ve done is we’ve aligned ourselves with things that might be recession proof. For example, medical devices, we kind of aligned ourselves with some companies where we could be making their accessory totes and different things, so we’re always keeping that on the back burner and some things that aren’t holiday driven and whatnot. • We had to reduce our staff about 30 percent back in 2009 because we went from about 95 employees down to around 70. But you take that time to realize that maybe you’re running a little bit too rich. If you have the opportunity of leaning things to be more efficient to look at cost cutting closer. I think that’s something that for us that has kind of been ongoing, to look at it a lot stronger and try to be more lean through the years. You really learn from that period of time. Those were again very difficult years for us as a company but we did come back stronger from that. • I have to agree with that. There’s going to be another one. We just don’t know when it’s going to be. • You’ve always got to be on the conservative side. You always have to keep that in the back of your mind but we went through that. We dropped 20, 30 people but we needed some weeding out. We kept the good ones. 219

When the economy starts coming back, it gives you the opportunity to get a jump ahead of everybody else and I think that’s key. Another legacy of 2008 was how the supply chain became more demanding. True? • I think to an extent for us, yes. It’s very dependable out there. You can have a customer for 10, 15, 20 years but there are always the people who kept coming into the purchasing departments who weren’t getting to know them. A lot of it comes down to what you’re delivering and if you deliver on your promise, and you get quality and you become a supplier who doesn’t hit the radar. Pricing is always important in our industry. There are a lot of suppliers out there. That’s another reason we have to find ways to be lean and keep our cost down real efficient as possible. • I don’t know if it’s all the big guys and if you start doing more business with them, they’re going to keep driving the price down and the more business they do, they keep driving it down. But I’m not sure that you can’t set aside from that and say, “Okay, delivery is a big issue.” Especially, coming from offshore. The whole supply chain is too long and everybody’s gone to wanting everything tomorrow not two weeks. Thirty years ago, if you promised delivery in 8-12 weeks, you were good to go. Now, if you don’t ship it within 10 days sometimes it’s five days, you’re not going to get the business, so they drive both down. They want you to ask, “How high?” when they tell you to jump, ship it on short lead time, good quality. You don’t have to be the bottom price but they’re going to keep driving it and I don’t see that changing. • I know in our industry it’s very competitive and what we see a lot of times is again bidding on contracts or whatever but there’s always one person at half as much as everybody else and their prices are below your cost for materials. You keep saying, “How can they do that for that?” They were trying to stay in business. You almost can’t blame them for taking that lower price. They’re getting a good deal. We’ve always tried to maintain, and our price is our price, we’re not going to say, “Well, we’ll match their price. What did they bid you? Will match it.” We try to give our best price every time and with us, with our suppliers, we’re always rolling them down on price. It’s a constant battle. • Another thing we hammer home with our sales force is managing customers’ expectations. So many people think that they can give you an order and you’re going to put it on the press that day and they’re going to get it two days from now. Well, it takes four or five business days to manufacture some of these things but a lot of the times, I don’t know why 220

people are behind on their due date by the time they get it to us. We’ll be constantly hammering home that it’s going to take this amount of days to manufacture this piece. People don’t expect to be able to give you two weeks to get something done anymore. • They want it when they want it. What about the skills gap. Is it still a challenge? • We’re looking for more skilled, semi-skilled labor and our industry is so mature that most of our employees are an older generation than I am. I can find almost no one who’s 30 years old, who’s looking to be in a skilled labor trade. I don’t even get applicants like that. The best I can hope for is to get someone who had worked on the assembly line somewhere and bring them in train them on the job for the equipment that they’re going to running but I can’t find anyone with the skills that we require who is out looking for jobs at this point. • I agree. In our business, as you keep moving forward, you’ve got to have CNC operators, laser operators, robot people, and right now, I was trying to think here, 100 percent of our people who run that piece of equipment we’ve trained in-house. We’re in Fountain, Minnesota so it’s not like we’re going to draw somebody from Rochester. Anybody that we get down there, we have to train in-house. • If society would take and say, “There’s an opportunity to be in the trades and you can make a lot more money.” It’s that we have to change the thinking of society, “Oh, I’ve got to go to college.” No, you don’t. If you’re in a trade, most of people in trades make a lot more than probably 50 percent of the people in college who graduated because they graduated with a sociology degree. Okay, what is that going to get you? • Student loans. • Exactly. That’s the other side of it. You come out of college with a hundred grand. How you’re going to ever pay that back? • You can’t. It’s going to be years. We’re doing focus groups this year with students. We were with one group in which every student around the table already had a job, and some of their new employers were underwriting the rest of their tuition. Why isn’t that message out there? • I can answer that question for you. Most of my peer group, when we 221

get together we talk about how none of our parents told us that the trades or skilled labor were viable professions. Everyone said, “You need to go to college and get a four-year degree.” No one even told us about the opportunities for skilled trades. It was hammered home that you had to have a four-year college degree just like 30 years ago you had to be a high school graduate and now you have to have a bachelor’s degree to do anything. Was that true in your school as well? • I’m into woodworking so I took a couple of shop classes. I remember a single day we were in the computer lab and someone from ITT Tech came in and talked about automotive mechanics. It was a group of 25 kids. There might have been two classes that were taking shop classes in all so you’re talking about 60 kids in a high school of 400 kids that maybe heard this message for 45 minutes and that’s probably the only access I ever had to those opportunities at all. Otherwise, it was just, “Which college can you get into? How many scholarships can you get? How much do your parents make? Let’s apply for FAFSA and let’s get you a four-year degree.” That was about it. • I go back into the early ’90s. We were growing. I remember down there the story was, “If they fog the mirror, we hired them.” The good ones are out there. It’s just not easy. You’ve got to really work at it. You’re going to have turnover. That’s the way it is. Another issue: What about competition from foreign sources? China? India? • For us it is. We’ve seen more business in the last year. It’s starting to go back a little bit. Part of that is the dollar is so strong that it’s really hurting us because now they can buy from Mexico. It comes down to the total dollars. I’m starting to see some people starting to shift back. • The tariffs, the taxes, the travel time to get it there and back, production time. The labor is going up over there. We’re seeing benefits from it. The American made movement is hitting the consumers. What about government regulations? An issue? • From the banking side, definitely yes. The amount of compliance that we had to go through has increased significantly. You’re seeing a lot more full-time compliance people, and financial institutions than we’ve ever seen before just trying to make sure that we’re following all the rules. We don’t lend less, but we inconvenience our customers much more. They literally have to jump through hoops. They’re aggravated. We’re aggravated. 222

Nobody is happy about it. At the end of the day, that’s the law and we have to follow it. It’s just the way the business is. Certainly, the government has definitely changed the playing field for that, and other activities. I’d be interested in your feelings in terms of the state regulations. Is the state helping you at all or is it hindering you at all? • The state has a pretty good impact on the growth acceleration. I don’t know how many folks here use those dollars, but there are funds out there that the state approves each legislative term. They didn’t go approve this last year. It was in the budget. It was there, and it passed through several different communities. It got to the actual top, then was mowed down, and passed down. • As a person gets older, you might sell the company, you might not. The only reason that I’m still in Minnesota is because I grew up here. It makes no financial sense for me to be in Minnesota. Absolutely none whatsoever. If I sold my company to anybody who wasn’t from around here, within three years it would be shut down. No question. Absolutely, no question. Nobody wants to talk about that. It’s not only that with the state. They have to look at what they’re doing to people who grew up and ran companies here. I have a number of friends, every time they sell, they either move to Florida, or Texas. They’re not a resident anymore. The politicians really don’t want to talk about that. • Wealth is leaving the state at an alarming rate. • Absolutely. Part of the reason that I bring that up is: If something isn’t done, it’s going to affect everybody as well. Sooner or later they’re going to have to do something, because it’s going to switch the other way. • The state wants us to grow our companies and hire more people. Yet, they want to take all of our money back in taxes to pay for programs. There’s not a lot really left over to reinvest in your company to be able to grow so that you can hire more people, and increase payroll taxes. • Some of our competitors are just across the river in Wisconsin. They’re paying lower taxes over there. Even some of our employees could, theoretically, live somewhere in Wisconsin. It’s not that hard for them. • The wealthy will do whatever they need to do to save their wealth, because they can. If you want to listen to a legislator tell you how they’re going to tax the wealth, I look at them, and go, “You’re a fool. You’re an absolute fool.” If you think you’re going to get any more money out of any 223

one of them—they’ve gotten more people to play with regulations to play with the tax code. Give me a break. Then it comes down to: What’s the pet project for this year? What are they going to not cut? What are they going to squeeze a little bit more? It all comes down to the middle class and the groups in that large mass who can’t afford to move and who don’t want to move. It’s just going to keep eating at them, whether we like it or not, or whether you believe the right or the left. I’ve had all sorts of politicians stop by in the past year. I don’t know why. I don’t know what picture that I’ve got up somewhere that says, “Here’s a fool. Come and see him.” Usually, I try not to be the only one in the room. I invite our banker, and all small business people who are in the town to sit across the table from them. Those of us sitting in this room, including that bank president, work sometimes till 6:00, 7:00, 8:00, or 9:00 at night. That money goes back into their communities, back to their employees, and the ownership. I find it the most frustrating time in all of my life. I didn’t pay enough attention to politics when I was younger. Do you ever find that when a legislator or any elected official visits you that they realize that manufacturers are the job-creating engines in their districts? • I think they did at one time. Now, they’re in constant re-election mode. You’re constantly replenishing a coffer to advertise against the next person. Yes. You’re out there trying to gain access to them after they leave. You’re two or three levels down through your emails. • Now we’re just a publicity moment for them. • Correct. • That’s all it is, yeah. • It doesn’t matter which side you’re on. If you’re a moderate liberal or a moderate conservative, when you get there, the whip is out. You are either going to fall in line, or you’re short lived. I struggle with that part of it for us, particularly if you’re going to sell. • It’s sort of sad. I like to stay out of the limelight. We do a lot of stuff. Some people might not even know where we are. We’re a small community. I try to stay out of political stuff. • I don’t invite them. If they came and called me up, I’d take them through. I’d be fine. I don’t need the crap that goes with it because nothing is going to change. They may tell you what you want to hear, but they’re 224

not going to do it. Why even waste your time? It’s a sad commentary, but that’s where it is. One argument for doing plant tours has been that you are teaching elected officials that manufacturing is probably not what they think it is and manufacturing jobs are a lot better than they think they are. Do you have that sense? • My opinion? I don’t think so. I think the problem with the system is that it is so portioned off. • The problem is that anybody who is better gets in there, they get ripped to shreds by the media in one way or another. • They don’t have a fundamental understanding about business until the point that now they don’t care. Let’s talk about healthcare. Is it more or less of a challenge? • We had healthcare for a long time. We discontinued it in October of 2014 because we had no choice. We had a couple of people who had major claims, and ours was going up anywhere from 40 to 60 percent a year before that. We took a look at it. Even before it was implemented, I spent hours and hours trying to work with this thing. There was no solution. The only solution that I got was that the government wanted us out of the healthcare business so that they could take all of our people, and throw it into Obamacare, or MNsure. We took a look at all of our people. Roughly 50 percent weren’t on our healthcare. They were under their spouses. If we discontinued it, the 50 percent would benefit. We elected not to do it. We took every single dollar that we spent on healthcare, and gave everybody raises except for a few who didn’t deserve it. • That first year people had difficulties on difficulties of getting into MNsure. It was a nightmare. It was a total disaster. Right now, there are probably about ten people who, this year, don’t have health insurance. They said, “I can’t deal with this. The new rates ... I can’t.” They’re on hold for two hours, and they can’t get any information. This whole thing is a total disaster. I feel bad as an employer. It was either that, or where it was going ... I was going to be out of business. I can’t take 50 percent of our people, and spend half a million dollars on healthcare. It’s just not in the cards. It’s not in the cards. • Did it make you less competitive as an employer? • No. What we did is this. We bumped the starting wage because of it. 225

We put our money back into it. Most of these people would rather have the dollar an hour than have healthcare. They’ll go without it. They can be covered tomorrow if they get sick. Somebody will take care of them. • That’s the problem. You can’t regulate this into somebody who makes a choice. You think you’re going to take it out of somebody’s taxes. • That makes me feel pretty good to hear your story, because that’s exactly what we decided to do with the money we were putting into healthcare. It was getting too expensive even before Obamacare. We just took that money, and distributed it evenly among everyone. Then, Obama was the bad guy after they passed the healthcare law. That’s exactly what we chose to do. • It’s like everything. Not everybody in manufacturing, and not everybody in business is the bad guy. The majority are good people. This was their money that was part of their package. That’s the way that we thought it. I wasn’t going to take that. That’s theirs. We still have to make the company better. Somehow we have to figure this out. • If healthcare would’ve really gone after the cost in healthcare, you’d have to go after their largest pocket donors: the drug companies. If the government really, really had soul, they would stop taking a check from pharmaceutical companies.

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FOCUS GROUPS

Pine City March 8, 2016

Pine Technical and Community College

Do you still feel the pinch of finding skilled labor? • It’s not fixed for us, but we’re seeing that we have to participate a lot more with the skilled staff and open up our eyes to who’s available to us and see what we can do internally to work with that. • Right now we are looking for somebody in quality, so not necessarily a quality manager, but there’s no one who has the skills to do it applying for the job. We’d like to bring somebody in, not that we have to train and we’re really struggling with that right now. Press brake operators are another area where it would be rare that we would have somebody walk through the door who has the skill that we would need. Is it true to say that you might be more profitable if you could fill the jobs that you have or is it not at that level? • I would say knowing what we’re currently doing, we’re investing internally because we can’t get skilled people. I would say that if we could, we would not have the expense of us doing the internal work on that. It’s required. We don’t have the skilled people we need, so if the choice is not growing and not having sales or being a little bit less profitable and getting Sponsor: Pine Technical and Community College

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the people that we need, we’re making that decision. • For us, to put it in perspective we’ve got some 200 total employees in the building. About half are machinists. We’ve got a lot of assemblers and material handlers and office personnel, supervisors, and eight engineers. The benefit we’ve had is our sales have been down a little bit with just the softening. We build quick couplings for the ag industry. On average the last three years, the last year we had 32 people out of the business, so most of them are retired. Our average machinist is about 54 years old. We haven’t had to replace a lot of people which has been a huge benefit. We haven’t had to lay anybody off either. I am definitely afraid of what’s going to happen because we’re starting to see the business picking up. We actually just hired four people last night. We’ve been in interviews for assemblers and we’ve done the same thing. We’ve had to look internally big time to say, you know, what used to be you could just hire a temp off the street and they’d work in assembly. Then, they could eventually throw them over into machining, but that’s not the case. • We’ve got vision systems, a tremendous amount of automation in assembly. Our machines are very, very expensive. We can’t afford to have somebody crash them so we need a degree from a Pine Tech. Our model has changed tremendously. I’m just really worried because we’re starting to get approval to hire more people now again. One story and then I’ll be quiet, because I like to talk. The people we just hired two years ago we started working with Pine Tech on using the AME. We have the alliance and then with the grant we started offering courses at Pine Tech to become a certified manufacturing technician. We’ve had seven or eight people who have done that. We also worked on the customized piece to say you can do this and then, you can bolt on. You can get about half of your machining curriculum done on campus without ever leaving the town of Grantsburg which has been hugely popular because they don’t have to drive and deal with that. Anyway, long story short, three of the four people we hired last night were in that program, have some skills, top quality, top safety, top maintenance, understand SPC that kind of thing. I was sold, we’re hiring these folks. One lady worked with us as a temp for I think a year and a half. She had no true manufacturing skills, but she walked in that interview yesterday and owned it. We asked, “Do you want to start today? How about that?” Actually, for once, I felt the investment we made a couple years ago is paying off today. • I can echo what he’s saying. We’re using that same program. We see it as a big, big thing. It helps us move people up the pay scale so that they can earn a sustaining wage as opposed to an entry level person. The economy 228

is, there are lots of folks below them, the unskilled position, you can fill unskilled positions because there are bodies. Moving them up and then you get to know the people before they go. As far as the shortage goes, I’m also involved in the Workforce Center. The statistics we see are if you’re worried you should be very, very worried. The next 10 years the number of bodies that we’re going to have to work with is not going to be anywhere near what we need to fill our positions. The work is trying to figure out how to take people who can only work part time, disabled people, people who don’t speak English. What it’s going to take to get them up to the point we can. For us to survive as manufacturers we’re going to have to bring in people we’re just not looking at right now. What do you say to people who have concluded that the skills gap is less about training and education than sheer population numbers? And if that’s true, retaining your current employees and making them more productive is especially important, yes? • The one thing that I’ve been telling our team in North Branch is just if core competency isn’t training and development, we’re going to be left in the dust. I think the site has been there since 2004, relatively unchanged with the exception of adding capacity. Now, I think, as of April when I stepped into the role, it’s much different, the strategy planning. One of the things that we’re going to look at is just the core competency training and development. We kicked that off really at the beginning of the year. To echo some of the struggles we’re seeing it’s more on the maintenance and technical side similar to what others have echoed in here. That’s the biggest concern. Is ISO part of that? • Not necessarily, I’ve been a quality auditor in the past and fully versed in ISO. I’d say we take the elements, but don’t seek to get certified. • We’re neck deep in ISO certification right now. We’re 2015, so we’re right in the middle of trying to get most of our staff or at least a portion of it understanding exactly what ISO is and what it’s about. We’ve got a lot of the same stories that we’re hearing here. It’s just anybody that we want to bring in in a semiskilled or skilled position I’ve either got to train from inside or we’ve got a mover from a larger metropolitan area really and that’s tough. • I come from the automotive industry and we were TS. I’m familiar with the TS and ISO 2008 and going to 2015, there’s a lot more grey area involved with 2015. There’s a lot more managerial I guess if you want to call it that—concentric. It’s a little different. 229

Any trouble getting buy-in enterprise wide? • Yes and no. Some people are okay with changes, but you’ve always got people who are adverse to change. It’s again working with those people who are adverse to it and convincing them that this is for the greater good and helping them understand why we’re going that direction that’s been the challenge. • The end of March is our certification. We’re finding a lot of gaps because it’s getting a lot more stringent and it is enterprise wide. They’re kicking every tire they can. We’ve done a lot of internal audits and found that the systems we had weren’t quite robust enough. There’s quite honestly some cramming and sweeping under the rug before the company comes now. It happens. I think that overall our quality system is pretty strong because the corporate level has invested a lot into it. Our manufacturing and engineering, they’re talking about talent shortages. We have eight right now, and of that, five are eligible to retire whenever they want. The reason I say that is about the same time we started the courses we also started a scholarship program. If anybody would like to see it, it’s been very successful so far. The way it works is we do two kids a year from (name) High School for machining. We’ve got a couple actually who are probably in class right now. They go and then they work part time for us. We pay for a lot of their schooling. My concern with it is that this coming year, I’ve got one applicant and the kid is not going to meet our minimum requirements of GPA and all that stuff. I’ve had a couple kids who have signed up for this thing and quit. They just didn’t follow through, for whatever reason. We wanted to do the same thing with engineering as well. We piloted with machining, but for whatever reason, I think there are enough kids out there. I don’t know if they all want to work in the Twin Cities or they don’t want to take us up on the offer. I’m shocked that you’ve got full-time summer employment. You’ve got part-time. You’ve got school paid for. You’ve got a full-time job with a Fortune 500 company when you graduate and I have one kid right now. I’ve literally talked to every junior and senior in Grantsburg High School. I don’t remember that kind of program when I was going to school, so something is amiss here. What are they telling you? • I don’t get much of anything. I did a presentation a couple weeks ago for whole bunch of kids; we’re trying to get in earlier. I went and talked to all the juniors. It was a careers class and there were 20 of them and in the end they all walked out. One kid quickly grabbed an application and left. I don’t know. I’m really scratching my head. • I think a lot of it is a lot of the parents. They think that you need to 230

break free of (name) and that (name) is just a greasy manufacturing company with oil everywhere—when it’s not that way. The perception I think is what it is. I’m ready to literally start picking up parents in a bus and bringing them in and saying welcome to (name). Do you want to see the new lighting and the new floors? How about the million and a half dollar CNC we just put in here? I don’t know what the perception is, but for some reason kids just aren’t getting it. • Minnesota has the worst ratio of counselors to high school students of any state in the country I believe. It’s very close to the worst if it’s not the worst. Also, the people they came out of the academic system. A lot of them have never seen the inside of a shop in their life. They have no clue. They’ve been in school their entire lives. They just don’t have any contacts with these people. • One of the things that we’ve done with the student tours is that transportation is a barrier, even to hire a bus so students can come and look at your facility. We found paying for the busing is not really expensive, $250 or something like that, to be able to bring kids in and have an engaging tour. Even greater than that, one day we had close to 200 students coming through throughout the day and we invited the community. It was so funny to see people who have driven by our plant for 20 years having absolutely no idea of what goes on in there and how excited they were. • My kids go to (name) High School, known for its academics, but when I go to their school for conferences or sports I’m amazed at how much the four-year college is promoted. They have monitors. Everywhere you can look you can see a monitor and they’re all filled with when the next university is going to be there. They’re all Iowa State, Michigan, Purdue. You won’t see Anoka Tech. You won’t see Pine City. They just don’t get promoted. I think parents want to see their kids do better than they did. For some reason that doesn’t translate into manufacturing type opportunities, I guess. You look at a lot of the kids and you ask them “What are you going to college for?” They don’t even know. I don’t know if it was like that when I went to school, but it seems like it’s promoted now. Going to college and just finding what your passion is, finding even if they’re not really thinking about an employable skill set job they’re getting degrees in things that are being pushed in terms just make sure you enjoy it. What is your passion? Whether it’s psych or communications, some of these degrees that are harder to translate in manufacturing type skill sets. If I quizzed 20 of my kids’ friends, none of them are directing their career aspirations toward manufacturing.

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• For the last 10 years we’ve seen this coming, so we probably work with 11 of the Pine City type, we don’t want to call them trade schools, but twoyear program schools from Wisconsin to Pine City to all the metro areas. In the last five to 10 years we started reaching out to local high schools because we felt that if we weren’t getting kids to seek the opportunities of manufacturing before they got to the four-year college route then we weren’t going the touch them for the next four to eight years. We work with 11 local high schools. We have two open houses per year where we bring in the counselors, the teachers and the students just as a way to see what goes on in manufacturing. Then, we have a career night where we offer them to come in and interview for an internship, summer jobs or even full-time jobs. We really worked hard to try to promote, to get into that freshman/ sophomore level of student, just to create some new doors and opportunity. We have scholarship programs. We’ll pay for the two-year programs for kids who are going that direction. After all of this we still struggle to get that type of interest. Now, what’s interesting is the parents come in and they’re like, “God, I would love to have this job.” They looked at the benefits. They looked at the pay and they still can’t convince some of these kids to consider this as an option. We hire four-year degrees from engineers to accountants to marketing, so that’s certainly a path that’s warranted. If you talk to Anoka Tech we find that more than 50 percent of their students coming out of their technical programs are actually second degree students. They’ve gone to a four-year path, couldn’t get real satisfaction out of a job or even get a job, so they’ve come back to a more skills based program. We probably have 50 percent of the people we’re hiring actually coming out. They’re not the younger generation. They’re actually the high 30s, early 40s that we’re hiring just because they’ve tried to figure out what they want to do in their life. They realize they need to make money and they need to have good benefits. Have you had success with your high school outreach? Do you feel it’s been worth the effort? • If I had to grade it on A, B, C, D, F, I’d say it’s about a C minus. I think particularly because the counselors don’t really help promote that when they leave the school. There’s no ongoing discussion on what this opportunity might mean and whether they go to (name) or anywhere else I just don’t think there’s any ongoing discussion. Now, we do see White Bear Lake reinvesting in what we would call manufacturing career tracks. They’re more like an engineering and a robotics, more of a higher tech. They’re not the trade type stuff necessarily that we’re looking for to run machining centers and even do the programming on the machine centers. It’s a good change where they’re trying to bring that back, but I wouldn’t say it’s necessarily the need that we’re looking for. 232

What about semiskilled or entry level employees? • For us it comes down more to work ethic. I think the other thing that was going through my mind is people are talking about manufacturing jobs. You go for a search or you look in the paper what do you see? Second shift, third shift, weekends, things like that. It’s not real appealing. Do I want to work Thursday through Sunday from 7:00 to 3:00 or from 3:00 to 11:00? We run a 24/7 operation. I think we’ve changed some of our shift schedules but some of our support teams are still on some rotations. To us it’s a big limiting factor. It’s just not that appealing to folks at any level, skilled or semiskilled. Does the pay differential help? • It helps. I think that’s one of the things that helped set us apart, but I think if you’re just looking at the ads and things like that, it’s a challenge still. It’s like they want to work 10:00 to 2:00, Monday through Friday. • We often joke that we love hiring people out of Iowa because we think actually the farm deal has taught people a lot of good work ethics, and that education aside, you’ve got to work. If we have people who just love to work in the garage, work on their car, just are mechanically inclined with a good work ethic, we’ll train them. You have people going to college and more and more haven’t really worked. Their parents have done so well they’ve supported school year round. I think just the work ethic and the motivation to work, not even just for the money, but for the skills and the accountability, I think, is something we miss. We’ve hired engineers who have come out of the University of Ohio or Purdue and don’t work out because at the end of the day, they just don’t have the work ethic. For a small company like us you’ve got to be willing to wear many hats. Some of these engineers come out and they want to be managers in five years. When we put them on the line for training for the first year their view is, “I didn’t go to a school to run a machine.” They can’t look beyond that to see why that training and that hands-on experience is important. • We lost one of our scholarship kids for this exact reason because I said, “Look, we’ve got 60 employees who have 30 years of experience on that A shift and they earned their stretch to be there. Your job is going to be on second shift this summer.” One kid got pissed because his buddies were out partying on a Friday night and there he is at work. He said, “I’m done. I’m going to give up a scholarship and my career.” • That’s a moral dilemma we’re facing right now because we may have to think differently.

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What about retirements? Are you offering any flexibility to keep people on board? • Yeah, what’s interesting is they’re pretty old school. They’re the ones who are there at 6 a.m. and they’re not there at 6 at night. We don’t really need to do in terms of benefits and compensation. I think what we really do is we give them time and money and resources to play a little bit more. A lot of these guys they want to bring in the newest, coolest machine or work with better systems, that kind of thing. As long as you keep them challenged, they’re really good. What I don’t want to do is stifle them and say I need you to keep doing the same thing you were doing because we have a lot of legacy machines that have been around forever. They brought them in in 1991. They don’t want to keep working on that, so it’s more just scoping the work and making sure they’re challenged. • We’re doing two really cool things now. We have a lot of people that we hired in the 1990s. As they come to retirement it’s going it hit us pretty hard with significant numbers. We’ve put two things in place over the last 10 years. One is this “retire up” program where from 20 years to 40 years, there’s an increase every year. It used to be a cash payout. What we’re trying to do is get people to stay longer from 20 years to 40 years. Each year they accumulate, it used to be dollars. Three years ago we transferred that to a health program. What we’re finding is then when people go to retire it wasn’t the money that was the biggest concern it was the health coverage. We put a system in place now where we have health dollars that each year they stay on until 40 they can accumulate a payout that we then pay out in a nontax payout. They actually get more than what the cash bonus used to be. They find that instead of retiring early, they’d rather stay on and accumulate more of a medical payout. That was a way to control when people were leaving. What’s the other program? • What we’re finding is that people would show up and say, “Hey, I’m putting in my two weeks.” We have a five-year program where if somebody chooses to and says I want to retire. The five-year program was a way to say if you’re thinking about retiring you can go to reduced hours. It’s a 24, 32 or 36-hour program. You can go to five days a week, four days a week, but you can stay on that program for five years. What it’s done is given us visibility that when people start thinking about retirement it actually helps them because they don’t need to pull the trigger right away. It lets us know when people are even starting to think about retiring. We find that people usually change that date at least two or three times before they really commit. When they go on the five-year program they have five years to really pick. No one has stayed on the program for the full five 234

years. Most are in the two to three window, but it’s given us visibility and control. The exit plan that a lot of our employees have had, I think a lot of them, between those two programs, might have retired earlier otherwise. Then, it’s also allowed us to retain some of the skill sets from these people with 30, 40, 45 years of training. We don’t want it walking out the door too quickly. • We don’t hire a lot of people every year. We can train them as we know we need to replace people. We don’t have active training programs that are just in place constantly. We just don’t have the type of turnover or hiring to keep those in place. Those are two programs that we’ve done to help manage the retirement situation. • We’re similar in that we’ve become really flexible with people who are getting towards retirement. If they want to work three days a week, if they want to work half days, we want to work with them and just really honor that skill set. Having conversations with them about their legacy because I’m not sure if anybody else in the room experiences this, but it seems like you go through a period in time with people who are highly skilled where they hunker down. I know this and nobody else knows it, so I value having those conversations about the legacy. All this wonderful knowledge that they have in these years leading up to retirement, the importance of sharing that with other people and getting the benefits of being able to continue working and having health care coverage, but having more flexibility in their schedule. That has been an interesting transition to have those conversations. • We’ve done some things, too, once people do retire, we bring them back on a part-time basis and you leverage them as trainers for the new folks. It’s probably not as structured as we’d like, but I know there are some efforts going on. At this point we’re probably 20 years from any significant retirees just based on how the operation was built and how the staffing was established 12 years ago. I know it’s definitely a concern. Shifting gears a little bit, what do you think of your company’s prospects for 2016? • We do a fair amount of ag. Ag is off pretty substantially. I think we’re on our fourth year. We’ve got a retired 3M black belt who is working with us once a week, I think. We actually had our most profitable year even though our sales are flat. It’s taken a little while for that to come around. I guess that was a surprise to me with some of the major business off, we had some that we picked up that made up some of that. I think overall we were flat pretty much, but our profit was good last year which was a surprise. 235

• We’re in a business where margins are pretty slim usually. They’re slimmer than you’d like anyway. I think it gets back to the same problem everybody else has with people who are getting older. We’ve already retired all of our managers except me. We’re not doing a lot of hiring because, regardless of what sales does, we might hire a few people, but we’re pretty stagnant. I think our employment has not changed much in the past 10 years. • We’ve retired quite a few already and I’d say millennials are the one area that is a puzzle to me. They come and they’ve got their phones and they’re all sitting there. I don’t know, it’s a different group than what I’m used to. I’m old so it’d be interesting to just to find out what strategies employers use to keep these people interested and keep them moving. • If you don’t read the business section, it’s positive. Our day-to-day business is pretty solid. We have certain sectors that are soft, agriculture, for example, but in general we’re optimistic. That’s not to say some of our customers are not having a bad year; they are, but in general we have a pretty good start to the year. • I think on ag it’s going to be a flat line. We’re not very bullish on our 2016 outlook. Any growth that we’re going to see is going to go through some R&D work that we’ve got going on and new products that we didn’t put out and market share gains that we can make potentially. Our full business is going to be flat. Are you operating your company any differently after going through the recession of 2008-09? • I think one of the things recession really forced a lot of industries to do is to learn how to lean out your programs. You have to do more with less. A lot of manufacturing groups didn’t know how to do it. Lean was a new buzzword. You had to learn what lean was. I think that it really forced you to do that, so I think that’s one of the things that we continue to do is to learn lean and teach lean and 5S. I think with our new core rapport with employees they’ve got to understand it. They’ve got to be brought up in that to instill that mentality. • I think for us it was learning. Who are we doing business with? Really looking at what industries they’re in and making sure that we’re being thoughtful when we’re reaching out and trying to get new customers to make sure that we have a really diverse focal business. In addition to that flexibility of our internal processes and flexibility of employees. We need

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to know that we can ebb and flow with what happens. Continuing to cross train so that we have people who can operate a variety of different pieces of equipment, so that we can adjust to what comes at us. It also gives us an opportunity when we do that to present ourselves in that way. It can also help you get new customers when you have those things in place. • A lot of our customers have gotten much better at managing their inventories and their projections. Whereas it used to be they just threw a whole bunch of stuff on the inventory to cover themselves and when it did slow down, not only did they not need anything today they didn’t need anything for a year because they had stuff to use up. Now, they do a much better job so that at least if their production goes to half that doesn’t mean they don’t need anything for a year. Another legacy of 2008 was that the supply chain relationships became more demanding. • You have good customers and you have customers that you just tolerate. Everybody talks about partnerships and which partnerships work well. The ones that just say that and then beat you up death, you hope you can find other business. I think that there are some companies that just notoriously play the game and you have to decide if you want to be in that pool or not. You try to stay with the ones that do well. • (Company) is up to 120 days payment schedules. To me it’s shocking that a company like that would do that to their suppliers. I just had an experience where (company) said they’re paying in whatever the terms were. They get to the fourth quarter without telling anybody, they decide they’re not going to pay anybody until after January 1st. There are some games going on with payments and terms. Not to mention the pricing. The difficulty it is getting even a penny increase. I think the terms are, to me, it’s predatory and I don’t think it’s right. That’s what we’ve been seeing. • Yeah, we’re in an interesting time because I’m sure if we polled this room, none of us, when we go to the store and there are two options, that this one had a price increase and this one was 25 percent off, that we’re rushing to this one first. As manufacturers, we’ve created our own problem. We’re very value driven in the way we run our lifestyles and that feeds all the way back into the supply chain where prices are a real issue. • I just think that for us, we’ve always been a high price provider in the market place. I don’t take great pride in that. We stay with the Cadillac, but I don’t think that’s a survival tactic that most companies can live by. The ones that continue just to live on high quality and high prices, that’s 237

unfortunately going to give you a pretty narrow band of the market and we’ve lived off of that. We’re not saying we’re going to be the lowest cost, but we’re acknowledging that we just look at ourselves. • We still have pretty good partnerships. We have some of our best customers that come to us and say we just need help on price. We know if they don’t stay in business we won’t be in business. They’re not just asking all the time to get a better deal so they can pad their pockets. They have Wal-Mart chasing them. • We try to avoid playing in the really commoditized. I had a situation in 2015, our largest customer, a big OEM, highly engineered parts. A new management team came in, sent the letter out and said we’re going to pay you in 90 days and we want price reductions across the board. I was able to work with them and that did not happen to us. We were able to talk about our pricing in an open and honest way; talk about where we’re achieving efficacies and we didn’t go to 90 days.

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FOCUS GROUPS

Anoka (Students) March 8, 2016

Anoka Technical College

Why don’t more people don’t go into manufacturing as a career? • In society, we’re told to get an education. We’re all told to go to college and become white collar workers. • The office job. • Yes. Does that include teachers, school counselors and parents? • From elementary school all the way up to high school it was, “You need to go to college, you need to get an office job, and that’s where the money is.” And some of us just can’t do office jobs. • Or we don’t want to. • I didn’t even consider machining when I started. When I was a temp, they told me it was a warehouse job, nothing more specific than that. So I thought I was going to be loading up trucks and whatnot. I just found out it was machining and after a few weeks, I just enjoyed it, since I wanted a job Sponsors: Anoka Technical College, Anoka-Ramsey Community College 239

where I could work with my hands. It just stuck. • To start out in machining, it sucks. You do a lot of bad jobs and you do them for a long period of time, and a lot of people can’t handle it. When you start out in machining, you don’t make a lot of money. And it’s a lot easier to go sit on an assembly line and get the same amount of money. It takes years and years to get to a position where you don’t have to do the crappy jobs. But ultimately you get to move up, correct? • At the time, I don’t think people see into the future of making more money. I think it’s the quick dollar. They think I can either do this and make ten dollars an hour, or I can do this and make ten dollars an hour. Either way, I’m not going to be doing them for very long is the thought process behind it I think. As opposed to deburring 12,000 parts for three weeks long, where sitting on an assembly line and talking to your buddy for eight hours is a lot easier. • Just to add on to that, even when I was starting out I was only making ten bucks, and I’m only making $10.50, so trying to make it so I can move up and get more money, obviously, and I want to learn more. Other people were saying, “Hey, you should look into this job or look into that job. That pays like twelve or thirteen bucks an hour but has no real advancement in it.” • One other thing that can discourage some people is the loyalty as a worker to one company doesn’t really seem to get you very far. It always seems like you have to have a job, just keep jumping them to get the next raise. Somebody will always appreciate you a little bit more, some people like to just stay in one place, have a home, but sometimes you’re not treated as a member of the family. Do you feel like you’ve found what you want to do in 10 or 15 years from now? Do you want to work in manufacturing? • Yes, I have. I was a firefighter. There’s a lot of stress in that type of work. There’s also a lot of stress in this type of work. This type of work definitely caught my eye because I constantly like to challenge myself in building things. I can work on cars and things like that, so the whole CNC portion of working a machine shop, and actually being able to see something start from a raw block and come to an actual part interests me. You talk about advancement; you look at CNC. You get the right training, you can walk into a pretty good job right away. There are good careers in manufacturing, right? 240

• I have a little bit of background in manufacturing, but especially in this state, there is going to be a big void. It seems like a lot of people are going to retire about the same time, so if you’re in this and you’re making low money, just by default, over time, you’re going to be moving up, because there are simply not enough young people getting into it, and there are going to be spaces to fill. So, I mean, long term, there’s a little bit of security I think. That’s why I chose it. • It’s a skill that, once you learn it, at least you know the rest of your life you have a skill to fall back on. No matter what happens in life. There is talk in focus groups among executives that some younger folks—the millennials—don’t have the same discipline at work that older generations did. Do you agree? Is that fair? • I can’t say that I’ve seen that in the two places I’ve worked at. • We had that lady at work who just all of a sudden didn’t show up. • That was a meth problem. She was way out there, man. Our job at (company), our doors don’t revolve that often. I think in the two and a half years that I’ve worked there, I’ve seen maybe one person let go or one machinist let go, one machinist quit, in two and a half years. • Yeah, but it all depends on the employer and how he takes care of his employees. • Of all the shops that I’ve heard about and that I’ve worked in, this one, this employer pays us probably the best I’ve ever been paid in my life. And it’s fair. You show up for work, you do your job, you get paid. It’s that simple. • The whole millennial type, you know, are just not as hard working, stuff like that. I’ve seen it vary from older generations to younger generations. The first job I was working at as a temp was at a construction site for Victoria’s Secret in Arbor Lake and we had two young guys, right out of high school. They showed up for two days and just chatted with each other and just half-assed it the entire time. And then one day they just showed up for two hours and they just skateboarded off somewhere. • I’ve seen it with different generations. Young kids come in, want the easy money quick. Don’t want to work for it. Then they go off to the next job and just keep bouncing around. I’ve seen old people do the same thing. I think it just depends on the person. 241

How much of it depends on the company, too? I mean, if the company’s showing you respect both ways, does that inspire people to show up more and stay and show some longevity? • I’ve seen it both ways. I’ve seen people who were paid pretty well still skate off, and the company treated them with respect and everything. And I’ve seen companies that treat their employees pretty poorly and the people are loyal and they stick around still. So to me I think it’s all in the person. • Exactly, it is in the person. Some people are just bad people, they don’t want to work. I mean, we hire temps and I’m in control of three or four temps during the day and I bet you I’ve gone through two hundred of them in the last year and a half. I mean, they come in and they leave. It’s just what’s going to happen. But, you get someone with good core values and you treat them right, they’re going to come back. They’re going to continue to work hard. Is there a challenge just because they’re temps? That the employer is saying I don’t know if I want you yet, so let’s see what you can do? • Absolutely untrue. We give every temp we have at our shop an opportunity. That’s what we do, we hire from the temp service. I mean, half our employees are from a temp service. If we could get four good employees from the temp service, we’d never have to use the temp service again. It’s just not possible. • I don’t want to say there’s a reason that they’re working for a temp service, but there’s a reason they’re at the temp service and it’s because they can’t hold a job, they don’t want to show up. They want to call in sick, they want to leave early, they don’t want to do their job when they’re there, they want to talk. There’s not always something, but usually there’s something. There’s a reason. • Our employer, we have a lot of people who come in who, they’ll hire people with no skills, stuff like that. You’ll find out pretty quick if they’re capable of doing things, so they treat certain employees really well, others not so much. Talk about this program, here. It’s giving you an exposure to a lot of different parts of manufacturing. What do you expect to get out of it? • It’s just another skill for me. Just something I can throw onto my resume, so I’ll probably end up moving out of this job, I’ll have something else to show I can work somewhere else. • They asked me if I would do it and I said, “Yeah, I’ll take any education 242

I can get. I’m not going to turn down learning a new skill.” • A piece of paper. Are you learning something? • We’re learning basic skills and stuff, but the ultimate end goal is to have something that values us, and that is something that we can take to other places or anywhere. For me, that’s the end goal. • I feel like I’m just too old. I like to learn new things but school, as far as that for me, I guess it just gets a little harder as you get older. • For some people, maybe. • Things like robotics, stuff like that, there are going to be lots of opportunities for that. • If I could take classes here, I probably would. But, I’m missing documents that would allow me to do it. And Minnesota has become so tight on who they will allow education and who they won’t allow education. I don’t have a diploma, so I can’t go to college. And there aren’t tech schools anymore. They call them tech schools, but you still have to have your generals. Unless I go get my diploma, then I have got to get my generals which is a year’s worth of college, and then I can go for the trade I’m looking for. Well, if I can learn all the same skills on the job, then why spend the extra money and time? • With the credit system, you have to get your generals in line, and if you look at a lot of these schools, they’re backed up on a lot of these classes for upwards of two years, and some more. • So, you could go through the entire program and be held from graduating the course unless you do these generals and why would you want to spend two or three years to have it all hang up on something that’s out of your control? Because the classes have been booked for two years. What do you tell others, relatives, friends, about careers in manufacturing? Would you want your little brother or cousin to do what you do? • I wouldn’t want somebody like my friends or family to go through it, I guess. • I’d hope better for them. 243

• I wouldn’t want my kid to be doing what I’m doing, if that’s what you’re asking. • You have high hopes for the people around you. Four-year college hopes? • Yeah. • Hopefully. • I would definitely encourage the best. • That’s how a lot of people at my work are. People with felonies, stuff like that. That’s where a lot of these low-skilled manufacturing people come from, you know what I mean? • Something like, a mechanic or a CNC guy, you get to see a different aspect of life and you get to see how everything you use in your daily life is made. You can see how different things are made, and you can judge different things that you see made, but it comes down to whatever will make you happy. • So I would encourage my kids to do whatever job it is, whether it’s a doctor or CNC or mechanic, but as long as they’re happy. Because if you’re happy doing what you’re doing, you’ll never work a day in your life. You don’t have to hate going to work, you don’t have to hate what you’re doing, but you like to do it. • And if you like to do it, then your passion is there and you do a way better job because you’re passionate about your job. • There are plenty of people at my work who are passionate about what they do. And there are also people who are not so passionate about what they do. But you can definitely tell the work, when you see it from one guy to the next. One guy, the quality of his work will be so much better than somebody who doesn’t like to do that job. • And then, again, there’s always another job, an area where they could go and work. There’s mechanic or maybe nursing, maybe they might like nursing better, or firefighting better. But, I think once you find that place that you want to be, your quality of life will go up. Let’s talk about the people who have passion for doing the work 244

around you. Do you see that? Do you see people you admire because they have passion for what they’re doing? • I think some of the people who have been in the industry for a few years realize how hard and complicated it is to be in a position where those few people are. • The head programmer in the shop has accumulated a great wealth of knowledge over years and years and years, and for him to be able to solve some of the problems and make some of the things happen with the machines, it’s crazy. His abilities are far beyond anything I could even dream of doing. I look up to him and we don’t always see eye to eye, but that’s on other things. He’s still a brilliant person. Tell me about manufacturing. Manufacturing executives, they’ll always say manufacturing is a lot different than teachers or parents or elected officials think it is. They all think it’s dirty, dangerous, and boring. Are those days really over? • They’re over. I’ve enjoyed working manufacturing for the last 12 years. Before that I worked in sales. And I hate dealing with people. I’d rather work in manufacturing. I mean, you’re always going to have people who have a tough day, that’s always going to be. And sometimes you just have to pass it up, and just know that they’re having a tough day, and let it go. • And when people are like that, everything seems to work really well. Most people are happy with each other. Put it this way. I see these people at (company) more than I see my own family. Most people are going to do that. They’re going to see more of their co-workers than they will of their own family. • Employers are becoming smarter, nowadays. They’re realizing that their shop guys, they’re the ones who make the money. So they’re willing to spend a little bit more to make the people on the floor happy. You’ve said that your employer takes care of you pretty well. Does everyone feel that way? • Not as well as it could be. That’s one of the big things in our shop; we do have a revolving door because people don’t feel appreciated as much as they should be. It’s not just one person in particular. There’s a lot of stress brought down on upper management and I think that the very highest of the management doesn’t appreciate the people out there making the parts as much. • Even when you’re in the locker, everybody’s in the break room, there 245

are really not any “hellos,” none of that and it’s felt throughout the shop, so the people don’t want to work for a company where they feel like they’re not ... I was raised to treat the janitor with the same respect as the president, so I don’t care who you are, I’m going to treat you with respect no matter what. That’s not always portrayed at our shop particularly. How about yours? • They know everybody in the shop on a first name basis. I mean, 90% of the upper management I’m Facebook friends with, LinkedIn friends with. Everybody’s pretty close. Everybody deals with everybody. The shop prior to this was the same way. At my last company, the owner of my company came to my wedding; he and his wife, his kids, they were at my wedding, because one of his employees was having a wedding. That also comes with a small company versus a mid or big-sized company, because it’s a lot easier to have the ability to be that close. What’s the best way to retain employees? • Opportunity to advance. • When you show stuff on the job, stuff like training, stuff like this. • Pay competitively. Make your employees feel appreciated. Is that two ways of looking at the same thing? • Two different things. I could probably go work at another place right now and get paid better pay than where I’m at, but I’m loyal. I’ve been at my place for five years. Whether my upper management sees that or not, I don’t know. I don’t think they do see the loyal employees and unfortunately, it ends up biting them in the butt, because those who once were loyal, don’t feel appreciated. They will walk out the door and will be somewhere that they do feel appreciated, that their loyalty is seen and appreciated. It’s like being in a relationship. If you feel welcomed and wanted, then you’ll be there. • When we were going through the recession from 2008 through 2012, employers held all the cards. They said if you don’t like your job, what are you going to do? Are you going to quit? You’re not going to go anywhere because no one’s hiring. Things are a little different now, but I think they’re still in the mentality of the recession. It just seems like there’s this turn and burn philosophy, temp services and things like that. • Companies hire MBAs and consultants to help them streamline their business, versus listening to their employees who are working every day 246

on the floor. One company I left decided to implement kaizen into their shop floor. I watched that company go down to the point where we were working 30 days a month, because they implemented this kaizen and nothing else was going to do. We had to make it work. It caused us to be late. It caused productivity and morale to go down, but the employer didn’t want to listen to his employees. He said, “I spent $150,000 on this program. It’s got to work.” • He’s right on lean, whatever you call it, 5S, kaizen, lean, whatever, it’s all the same thing. It just doesn’t work for short-run shops. What they want is to do setups over and over and not look at just doing a job for a longer term and that’s all borne out of the people who come up with the lean and all that, they are from college backgrounds and they study this. • In a short-run job shop, I just don’t see it. Jumping in and out of jobs like that, it’s causing more time to set up than to actually machine. That’s where there’s the disconnect. The executives like the idea of lean. It’s a nice neat package. They’re going to adopt it and everything’s going to be better, but it would be a lot simpler to listen to the group of people who work for you and that you see every day. • My personal employer right now, you mention the word lean to him, he’ll kick you out of the building. He already knows that’s just not going to work, that it’s a gimmick. He knows it from experience, watching any other machine shops crumble around him because of it. • Nowadays, there are companies out there that are hiring these lean guys to come in and cut costs at the bottom end of the company and eventually, it’s going to cost them at the top end. What about the idea of wages? Do you feel like you’re paid adequately or are you looking for places where you might make more? • I definitely feel like that a lot of times. I feel like I get underpaid a lot of times, doing jobs that nobody wants to do. But I know if I just hold out, I’ll get what I’m looking for eventually; I’ll get more training, hopefully get in a program with a higher array of options. I know the shop that I’m working at, I definitely can get those opportunities. Some areas have very low rates of unemployment, sometimes as low as two percent. That puts the value of employees at a premium. If you get two bucks more an hour to move, would you go? • Definitely tempting.

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• No. • Probably not. • Everyone here has an opportunity to go somewhere for more money and there’s a lot more to make, but the environment that you work in has a lot to do with it. Yeah, I can go down the street and make $4 to $5 more an hour, without a question in my mind. It wouldn’t even take very much effort. Is it pride of work, quality of organization? • It’s the people I work with. I’d have to rearrange everything. I wouldn’t know anyone going in there. I wouldn’t know who the owner is. I wouldn’t know the boss. It’d probably be a bigger shop. There are a lot of factors besides just your wage that goes into it. • Benefits are a huge one. • It’s funny, because when I got out of high school, I never even worried about benefits and now I look at my benefits as a part of my wage and I have to. • Because they are. Otherwise you’re paying for them. • Yeah. When I talk to family members about my wage and stuff, I’ll straight up tell them, I’m getting paid way more than what I’m actually just earning. If I include my benefits in my wage, I am getting paid well beyond, if I went to college for four years. • It’s unbelievably expensive, the benefit packages. • That’s the kind of wages, even if I don’t include my benefits, I’m still getting paid better than I could have ever imagined for the amount of education that I have. With benefits, yeah, I’d probably say our benefits where we work, that probably tacks on another close to $10,000 a year to what we’re making. That’s huge. • It is. • We get a Christmas bonus, too, so that’s nice. Do you consider your benefit package to be part of your wage? Do you consider it your right? 248

• We didn’t get benefits until a year ago. We’re at a smaller shop, though, and things evolve as the shop gets bigger. A manufacturer told me yesterday health insurance for his employees just got too expensive. He couldn’t afford it anymore, so he cancelled his policy. He divided up all the money he spent—about $500,000 a year—to his employees so they could get their own plans. What do you think about that? • I think it’s ridiculous. Those people who say that, what’s the model that they want? Everybody to fend for themselves? It’s going to cost society a lot more when we’re all paying for people who are uninsured all day. It used to be like a given that you would have health insurance. It used to be a given that you would have a pension at retirement. I understand a lot of those things don’t apply anymore, but come on, health insurance, at least, can I live? You know? It’s one of those things. • At that company, everybody must have gotten at least $9,000, $10,000 a year raise to get their own health insurance and depending on what each individual person feels they need to have for health insurance, they could spend $2,000 on it or they could spend the full $10,000. • I think a lot of employees don’t realize how much the employer actually pays for health insurance. • We were given three choices this year, like I think everybody is now given under the current law and what I’m paying, I pay $25 a paycheck for my medical and I think my deductible is $1,500. On top of that, after the deductible, after $750 more dollars, it’s 100% covered. My employer, he pays about 85% of our medical. You can just imagine what’s coming out of his pocket. • If costs keep going up, I mean, eventually he’s going to have to say it’s cheaper for you to get private insurance than it is for me to keep covering the cafeteria plan. • If you cut a check of five grand to each employee, it’s reckless in a way, because do we really think that all the employees are going to take that $5,000 in cash and go spend it on health insurance? • Isn’t that their responsibility? • We all know that’s not going to happen. That money is going to be spent on a jet ski or whatever. 249

• It’s absolving them from the issue. They get to wash their hands of it. Would it be easier is the government covered everybody? • Easy. I would say Medicare expanded for everybody. Simple. Then you could argue about who’s entitled to what. I mean it would just be everyone who’s over 65, you could argue enjoys free healthcare, it would just be expanded to everybody. Yeah, it would be a task, but I would see it like everybody was putting into it, like we do social security, we don’t complain about that. The employers and the employees wouldn’t have to worry about healthcare at that point, but that’s going into a whole separate issue. • That’s opening a can of worms there.

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FOCUS GROUPS

Anoka March 9, 2016

Anoka Technical College

If any of you read the survey last year, a full 89 percent of the 400 executives surveyed said that they were really optimistic about their business going forward into the coming 12 months. • Well, I think we were a little unsure of what we were going to see in that coming year and historically our November through January gets a little soft. I don’t know, maybe some of the other industries here can say why. We did pretty solid months. In fact, I believe they were substantially higher than we’ve had historically, those months. Yeah, we were quite pleased with the outcome. • We had a great year last year. We’ve been in business for five years and we had a record year. It looks like this year will probably be the same. We want to do more, sustain more training and just put some more skills around the shop. The frustrating part is finding the skilled labor and being able to afford health care, in a nutshell. • We ended last year very strong on the bookings, carried it into this year. There are bids out there. People are talking about projects that are coming. That’s positive from where we come from. Sponsors: Anoka Technical College, Anoka-Ramsey Community College 251

• We started out the year very optimistic. We’re a company that has a lot of long term planning. It takes four or five years for us to develop a project. We have tens of thousands, if not hundreds of thousands of dollars invested in those projects before they come to fruition. We were very severely affected by the downturn in the metals commodity markets. Not because of our manufacturing but because the companies that we service and the projects that we’d been developing relied upon returns that they were not able to get, you know, from the recovery of some of those products. That coupled with tight money; it’s hard for developers and people to get money, to be able to go forward beyond some high level grants to do some of their development work. It looked like it was going to be there at the beginning of the year. A lot of things were moving and then it all kind of tightened up and it kind of went away. We were also affected by one mining project, which again was a commodity based deal, but it was also environmental. It was actually a clean up project, something that was actually going to help the environment, but because the money was tight and because commodity prices were down, the company was not able to go forward with the project. Are there more strong winds in the face or is it pretty much the same as you look forward as it was the last year? • We were very, very optimistic on how the year started. We had a lot of contracts in the medical industry that were starting to go from validation to production. Those started out really, really well for us. Some of those projects are holding strong and doing well but some of the industries within have slowed down a little bit. In the computer areas, in the ag business, in some of the other areas but medical and aerospace still seem to be very strong. • This year, we’re looking a little bit more reserved going forward in 2016 than I forecasted for last year. Lot of things that are happening out there, whether it’s the election, whether it’s what’s going on in China, what’s happening in the stock market. We’re optimistic to have growth here this year but at the same time maybe not as big as last year. • We feel fairly fortunate we got through last year, of course going into this year is not quite as optimistic. We do little business in Minnesota, our business is done throughout the country so we’re very diverse but ag is in bad shape. Oil and gas have been drastically affected. Those industries and tier two suppliers that we do business with are down anywhere from 40 to 70 percent. I don’t see that changing this year, in gas and oil or agriculture, or maybe at all.

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• Our story’s a little different. We kind of took the company and took it back to the studs a couple years ago and started rebuilding. We suffered a little bit of downtime during those couple years of rebuilding. What we saw at the beginning of this year was that our growth pattern was very significant. We invested heavily in technology along with our work force and through those two things, we were able to start to bring in some good contracts that will sustain us through at least the third quarter of this year. It’s been good for us. Maybe if we could shift back to eight years ago when we started this. When you look at the trends over the eight years, you see some dramatic increases but one of the things that we hear on a regular basis is that OEM relationships and supply chain relationships changed pretty dramatically as we were coming out of that downturn or maybe during the downturn. Someone said the other day that it used to be if you had two of the three—price, delivery, and quality— you were okay. Now you have to have three or three and a half. Have those relationships changed and are they here permanently? Are we ever going back to longer lead times? Or are those changes that were kind of a part of the transition after the downturn of eight years ago really here forever? • I don’t think that, at least in my world, the lead times will ever be extended. I think they just keep getting shorter and shorter and shorter. I think the customer is expecting on-time delivery. We’re a service company, we are 24/7. If they call in the middle of the night, they put an airplane on the Anoka tarmac. We call people in and that’s how we service our customers. • My company deals in the industrial distribution supply chain world throughout North America. That’s changing. That’s an ever changing world out there. Contractual agreements change from one to the other, prices ... I was just on the phone with General Motors the other day and they’re asking their supply chain to bid on their contract as last price paid. • What’s going on with that supply chain is last price paid is what General Motors will pay for. Ten years ago they paid $20 for a product, you can’t raise that price. The distributor needs to go in there sell at that $20, they don’t have the management fee, so it’s getting very creative in the supply chain on how they’re getting paid, how they’re getting their money. What we’re finding is that those folks are now asking for rebates on the back end, which is totally outside the contractual agreement they have with their end user.

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• I think it’s just changing, shifting. • As we went through the downturn, customers became spoiled, they could go to any three shops and they could get the lead time they wanted. I think for all of us, if we had any stock type equipment, our parts, we consolidated, reduced our inventory. Now as things are starting to build up, what we find is lead times, people don’t have the stock on the shelf to purchase components or whatever we might buy. Lead times are pushing out but buyers are still reluctant to accept it. The customer is still spoiled, in my opinion, on lead times. • Anything over four weeks and our customers start to cringe. We have a tough time meeting that sometimes with our supply chain. They don’t want to have the parts, we don’t get the update that they’re going to be late. We’ve got to struggle to do damage control. Another issue we have is that when it’s slow, we’re busy because our customers put us on all these initiatives to lower prices, take a look at this, go out for rebid, go up for quote, can you shorten the lead time? It gets crazy around there. We’re trying to grab new business and take care of the customer with all their requests. It’s a pretty big undertaking. • Some of these companies we deal with are billion dollar companies, or half a billion dollar companies, they’ve got the resources. We’ve got limited resources. We’re willing to do whatever it takes but it’s just a challenge we have. • That ties into when there was a downturn, all of our factories cut inventory just like everybody cutting inventory. Everybody has to be more conscious. Customers aren’t getting the forecast, we’re not getting the forecast to drive that material. We’re always in reaction mode. You’re only as good as how quickly you can respond to this order or the next order. • There continue to be challenges and the good thing though, the takeaway that I’ve seen, is that a lot of our OEM customers are bringing stuff back from China. I see continued pushback into the States. They want that reduced lead time but they can’t. They want that increased quality. The challenge I see ahead is that people are starting to get it back here, then start to look to Mexico as a kind of a lower cost center. I think we have challenges there as manufacturers too. That brings up the topic of workforce. Whether we talk about it in number of employees or whether we talk about it in the skills that we need because the skills of manufacturing really have changed. There’s 254

less and less manual and more and more you need to have science and technology in what you do. Now related to opportunities coming back, let’s talk about the workforce challenge and maybe you can share things that you’ve either done or things that you haven’t been able to do. Maybe there are opportunities to come back that you haven’t been able to take advantage of because you can’t find enough or the right kind of workers. • The problem we run into is we’re a shop of structural steel. If I have a welder out in the shop and they are welding on one of the beams, columns, whatever it be, they have to know how to measure. It’s like a whole project. It’s not just a spot weld, a spot weld, a spot weld. It’s not mechanical, they actually have to use their brain when it comes to putting together from the blueprint what the end result is going to be. When that goes out in the field and the director is calling and saying, “This stuff doesn’t fit.” That’s a problem. A big problem. • It’s that kind of skill. Then when you do get those, that kind of skill in the shop, just to back that up we have random drug testing. I don’t know, how are you guys doing with the pot thing? • I never knew there were so many ways to cheat a drug test, but I’ve learned a lot. It’s just getting that person in there who is proud of their work, you know? A couple years ago we changed the word from soft skills to essential skills. Essential skills mean showing up on time. It means being able to communicate with your workers because there is no such job that’s isolated like maybe it was years ago. • I think there’s really a gap in the skills. We basically need the machinists, the people who are trained as machinists or at least have the elemental training of a machinists. I mentioned to (name) earlier, I’ve been with a company for 20 years. When I started there, if I threw out an advertisement because I was looking for a machinist, there were all kinds of middle aged guys who would come banging on the door. Those people are all retiring now. I think as a parent myself, I think the last 20, 30 years we’ve been telling all our kids to go to four-year colleges. We’ve seen a real shortage of people going to technical schools, whether it’s to be a machinist or a plumber or anything like that. • Our focus right now is really I’ve been working with the technical schools trying to fill the pipeline with new talent helping. • Educator: Our manufacturing programs are all full of students. 255

If you talk to the faculty you’ll learn welding, machine tooling, the drafting. Those courses are full. Which is good. The downside, a couple of downsides to that is that all the work I talked about doing with manufacturers, a lot of time we rely on faculty to help us with that and they don’t have time because they’re busy. Our welding program, I think we have probably 100 students in there. The other downside is if you took us, Anoka Tech, include St. Cloud, St. Paul, Dakota County, if you add all those up, that’s about 125 machine tool graduates a year. Nothing. That’s it. That doesn’t count the retirements within the (name) corporation in the next three years. Not even close. I talk to people, not unlike yourself, it’s going almost crisis mode depending on where you go. When it comes to future workers. Well, when you get two hours from here you do have quite a crisis. Are you developing more training in-house too? To get people who, in the past you might not have thought about, but you’ve had to invest in your own training programs to complement what either consultants or colleges are doing? • We’ve been training and stealing shamelessly from other employers. We pay scale wages so that keeps us steady with them. Being a small business, we do a lot of changeover and a lot of medium-run jobs. Somebody young comes in, they’re not given the time to perform the skills that they may have the ability to because they’re so far down on the totem pole. We’ve been able to skim them away after being frustrated because they haven’t been able to progress into that type of a business. We’ve been fortunate being able to get a few employees from the larger shops and then we’re training ourselves. There have been some changes in the state of Minnesota. There’s been a lot more support. Enterprise Minnesota. I’ve seen it change in the last five years to get more people into the industry, starting at the high schools, talking with the people doing metals, plastics, woods, whatever they can in order to say, “It’s okay to get into manufacturing. The old machine shop of the olden days of dirty, grimy places is no longer what it is anymore. They’re sparkly, they’re shiny. They’re really nice places.” • I think it’s starting to come back. People in the manufacturing sector can make a great living. I keep preaching wherever I can. I think there are a lot of careers. We did a survey of about 75 small companies, under 250 employee manufacturing executives a couple years ago, to see where they got their college degree. There were a couple from the Carlson School but the bulk went to the technical colleges. Dunwoody and our state colleges and it built manufacturers 256

or it built careers. All the service industries talk about careers, we talk about jobs, maybe it’s time to talk about careers because that’s really what manufacturing presents. How about you? • We’re a little different than you folks in here. We own a few different companies. Manufacturing is a very small part of what we do. We’re actually recently getting into it with custom machinery, hydraulic fluid powered stuff. The biggest part of our work is heavy transportation. Truck trailer, and so on. The biggest thing we see is not enough people coming into our field on that side of the business, the truck trailer repair. My opinion is we cut everything out at the high school level. I don’t even know if there’s much of a wood shop left anymore. That’s a problem. When they do end up going to a two or four-year for truck or trailer repair, they don’t get the skills they need to interact with other people there. They might have the mechanical skill but they can’t talk to customers. I’m on the advisory board for Hennepin Technical College. At our last meeting, we were talking about how they couldn’t get through their general education because the classes were full. They were going to open up basically basket weaving so they could get through. That’s no good to us to just push somebody through, you got to keep them in creative writing, math, some other stuff where they can do some listening. Even social skills type stuff. That’s a problem. On the manufacturing side, it’s kind of the same thing as you guys were saying, we just can’t find people. Or they get there, they think they’re entitled to a heck of a lot more. They see the salesman walking through the shop and they say, “Hey, we want to be that guy.” They worked there for a year. Somebody else says, “You can be outside sales for us, selling pumps and gears and hydraulic fluids and fluid parts.” There’s a lot of bouncing around, same thing. We see a lot of people. It’s just almost what you have to do. You mentioned trucking and logistics, when we hold these focus groups in greater Minnesota we regularly hear about the difficulty of getting goods from there into the metropolitan or onto main. Is that an issue? Just shipping and handling? • I think transportation is stronger now than it’s been in a long darn time. I can’t imagine anybody here having a problem getting a product anywhere. • The prices—they’ve never taken it down from the surcharges. They just stay on there. • Oh, the fuel surcharges. • Yeah, they just stayed on there, even with a fuel drop. 257

• They should just label it profit now. • Unfortunately, that has become the profit now because it’s a problem with the vendors and last price stuff. We’re dealing with the same stuff in transportation. We’re having to raise our rates, we’re having to keep more on the shelf as a distributor because the manufacturer has a long lead time. Our customers expect us to have it on the shelf or they’re gone. Not only do you have to have it on the shelf nowadays you have to be the lowest bidder. It’s a race to the bottom every time we turn around. • You will see different surcharges and everything else come along because, quite honestly, our shops supply this, we can’t make a profit center. Our labor rate gets crunched all the time. We bumped it and then transportation rates go up which affects everybody. We’re kind of maybe in a little different business on some of the stuff, but it all plays a part in what we do. Again, finding truck drivers is an issue. Truck drivers are making very good money, $80, $90, $100 grand a year. Our mechanics are making $100 grand a year now. • You touched on entitlement. They come in, they’re entitled. The wage, they’re entitled to, entry level. They need that. This is what they’re asking for, yeah 8:00 to 5:00, you can see the smoke from their shoes flying out the door. It’s crazy. • That’s like he touched on. It’s a by-product of upbringing. • Everybody’s a winner? • All of us at some point and time in this room worked. From the time I was 13 years old, I worked either in my parents’ shop or whatever I needed to do. I never looked at it as a job that was beneath me. That’s the problem. We’ve sheltered some of our children from exposure to some of these things like wrenching, getting underneath the truck and changing the oil. How many of our children have actually gotten underneath a vehicle and changed oil? I know I can say both of my boys, 8 and 16, neither of them have ever changed oil in a vehicle. The eight year old, acceptable. The 16 year old, maybe not so much. It is a little bit our own by-product. As you said, I hope that it comes back because right now for instance, my boys are doing cottage labor jobs. They actually do online schools through IQ Academy. They basically get done with their schoolwork, they focus on that, they can still participate in sporting activities but they’re doing work. They’re learning real world manufacturing skills at 8 and 16 years old. Then in the fall, my oldest boy will start at Alexandria Tech. Starting 258

classes at 16, so I’m hoping that I’m one of those getting them some of those skills so that they’re not going to go in and say, “This manufacturing job working as a machinist or automotive mechanic is beneath me.” It’s all in what makes you happy and where your skill set is. I hope that we can revert back to those days because I think part of it ties into the household. The two parents working versus the one parent being home and grooming. It is a little bit of the by-product of both parents being out of the house. How does this affect wages? • We’ve been increasing ours quite steadily in the last two years. In fact, when I’m at job fairs and talking to some of the students, I’m preaching that as well. You think you can make money going to a four-year college but going through a two year, or even a one-year machine course you can come out of there making $35,000 a year. You’re making $60, $70, or $80,000. • You don’t have a hundred thousand in school debt. • We’re all asking these kids to go to college or go into skills or technical, but I believe our teachers at the highest level are preaching a four-year degree and making it sound like what we do for a living is bad. We’re actually quite profitable and enjoying it. That’s our biggest problem. We’re taking too much at the high school level, that is what I think is failing us in here. We’ve been good students like every one of them. It’s getting them into the program. There just aren’t enough kids going in. So you’re saying that not only is it the image sometimes of what people think about manufacturing, it’s the fact they don’t appreciate the kind of earnings they might make. • I don’t think they understand the earnings. I don’t think they know they can make money doing it. • Someone else mentioned before that the environment has totally changed too. People still have this image of the dark, dank machine shop and it’s not like that at all anymore. • One of the things tied to machining, or one of the other trade skills, is when you go in and you work your hours you can remove yourself from that. As most of us know, as either owners or managers, we’re never away. There’s an electronic collar on each and every one of us. When you are in a trade skill, a good portion of the time if you’re the worker you can actually get that time to do some recreation, some other things on the weekends that really everybody works toward. Go to the cabin or go boating or hunting or 259

fishing. Whatever you can. Sometimes I think that’s really overlooked. It’s all about the glamorous white collar job that, like you said, the high school is maybe preaching. That’s where you need to go to be successful but what is success? What do you deem success? Is it a rewarding career that allows you to enjoy your family and recreation or is it that you want to work seven days a week and be tied to an iPad? • Well, I also think it’s figuring out what makes your employees tick too. The ones you have, so you can capitalize on their strengths and figuring out when they want to work. Just asking them. We’ve had some great success with the four tens and then Friday is always overtime. That worked out quite well because we worked the entire summer from April through October with overtime. We said, “Okay, they’re getting kind of burned out.” We’re like “Okay, two weeks off.” They’re like “Whoa, when can we have Fridays back?” They enjoyed that overtime and they all walked away with almost sixty grand each. That’s a manufacturing job. That’s nothing to shake a stick at. That’s a good living. • That overtime, they start to depend on that. When they don’t get it, then all the sudden “Now I can’t pay everything. I need more money or I’m going to jump over that fence.” • You get paid for overtime? • We try to balance that. We’re going to hire somebody; we’re not laying anyone off. We’re going to find a way to keep you working all year long. Sometimes in construction fabrication, the projects aren’t always there so you have to have another revenue bucket to kind of help balance that out. It’s a changing game. • I think it’s a combination that we see as wage and benefit. I’m part of (company). They’ve done a lot over the past five years in the whole benefit package. They’ve really become competitive with the benefits along with the wages. Through the diverse companies that we have, the wages will fluctuate. In different companies we hire skilled laborers, machinists, welders, material processing. We’ve seen that impact from the cities area that drives our wage up from the skill work set so we’ve had to make adjustments over the last few years on that. But (company) focus is the benefit, wage package and sometimes that’s a tough sell to new kids. They want that check in their pocket. They don’t understand the 401(k) and savings plan. We’ve spent a lot of time just helping them put the money in the right bucket because it’s going to pay off for them down the road. • I agree. The younger ones, they’ve also found out that they can parlay 260

by hop, skipping, and jumping between shops to make seventeen bucks an hour to start out, to be trained. Then they can jump to twenty. Then to twenty-three. They can move faster by jumping than by staying still at one place so I think they’ve learned our top end has shifted up between thirty-five and forty bucks an hour. The top is moving up and creeping as it should but the bottom has moved up much faster. Our average dollar value per person has gone up much faster than the average. • I came from a company where we always paid a little bit ahead of the curve. We stayed there and we then incentivize with bonuses based upon profitability of the company. Everybody shared in that. We had a good work environment. People enjoyed that. We had diverse and interesting work. People enjoyed that. People wanted to work for us. It was a good thing. We never had labor problems. We were signatory to every single labor union except for the pipe fitters. We did better than they did when we went into negotiations. We signed an agreement with our people that we would back pay them whatever we came out of that agreement with from the time we started the negotiation. We wanted to make labor a nonissue because we knew that if our labor force was steady and stable, that over the long run we would be able to do more with less and it proved out. I came here to Minnesota and we were behind the curve. I was telling some of you guys, our labor force is different. We don’t physically ... We’ll manufacture. We produce these systems and we build them. We build those through a network of subcontractors and machine shops. We’re primarily an engineering company and it takes us four to five years after we bring somebody into our company to be able to bring them far enough along that they’re really worth anything to us. It takes us that long to do. So we’re very, very protective of that skill set. • I laugh because you bring in a draftsman from here and maybe you’re paying him eighteen, nineteen, twenty bucks an hour. We’ve got a great program. We do training. We throw them to the wolves. We let them choke. We help them. We don’t let them fail, but whatever their ability is we let them go and we try to move them along at whatever pace. That really keeps people engaged. Then I found after I was there that the way that the company was run was that they were lagging. We’d get a guy in the program two years and then somebody would come and they’d cherry pick them. So we were chasing, where is that point? Where is that curve? It was way ahead of really where, if you go to any of the data points or you go to any of the information that you could get where that was. Benefits were a big problem. They didn’t know what a health savings account was. They just knew that they wanted to have one until they had it and then they didn’t want to do it because they wanted money in their pocket. They 261

wanted that option, that’s what they heard. What you said about benefits, it’s not a big deal to a young kid, that you have a good 401(k). To a guy who’s in his thirties with a child or two, or to a guy who’s in his 40s, those things are worth more to them. • You talked about flexibility. In the summertime here in Minnesota everybody’s got a cabin. We didn’t do that down south but people are just hightailing it out of here so we work summer hours. We do nine hours and then a half a day on Friday. It’s a great recruiting tool. People are happy to do it. If we have to work a little bit of overtime, they get their overtime done on Friday. They head up to their cabin Friday night and they are usually pretty happy about that. We’re using a variety of things to try to retain these people and keep them in our program, but you’re right, the wages have gone up. I get kids out of school. I’m paying them astronomical money and they’re worth nothing to me. They think that, like you said, they’re out the door. It just amazes me. Nobody in my generation was out the door at 4:30 and their office is empty of the young guys. The older guys are there working. My generation, or maybe a few years, why should I do that? • I think, what I’m finding is that when we get them in the program and we hold them long enough. They see there’s a payback to them. Then they’re willing to change their ideal a little bit but it’s a process. Keeping them in, you pay a lot of money up front. If we can’t hold them past four or five years, we really don’t get that return. Two or three years ago if you would have asked the age of the person, health care wasn’t a big deal. Because the last two years, the Affordable Care Act or whatever you want to call it has brought a lot of visibility to it. Health care is dominant, it seems, in competing. What about the cost of health care? Has it kind of stabilized in the last year or is it less uncertain than it ever was? How are you being affected by the changes that took place in the last two years? • I’ll jump in first because I just got my quote this week. We renew in June so the numbers just came in for us. We do offer two choices. One is an open access plan. One would be what they call a connect plan, which is a smaller group choice. We go through Preferred One. That’s what we used last year. We’re seeing between a 4 ½ and a 5 ½ percent increase this year. Last year it was similar. For us it’s a very small shift, but friends and other businesses, we’ve seen them have a huge shift. People who are actually doing that ACA stuff have seen a huge jump. Ours has been pretty stable from the pool size that we’re in. In a small business of fifty employees and less. We’re very, very fortunate. The changes that we saw, the plan that 262

we have every year now is discontinued. No longer is that plan available. Here’s your new plan. This new plan has a slightly higher deductible, slightly this change, slightly less of that. While they’re giving a small increase, or a slightly more manageable increase, they’re also downgrading the plan a little more to make it more sellable. Is this creating conflict in your employee/employer ratio of what you pay or what the employee pays? • We pay our employees well so I think all in all they still feel privileged. They see and hear from their friends as they’re sitting at the bar, or they’re having dinner, or they’re going out doing things, they talk about these things. It’s no longer the quiet conversation. You talk about what’s going on with your healthcare plan. You talk about the increase that you got. I think there’s a lot more sharing of information these days between the younger and the middle age people. I think the talk is there so when we get a five percent increase, average five percent this year, I think they’re going to hear other horror stories from their friends. They can put it in perspective. • It’s getting to be more consistent, I would say. The smaller group at 1,500 is being more consistent but the larger groups I think, what companies are really trying to do is they have to focus on how do we retain and attract talent. It’s not necessarily a cost but how do we manage that? The company putting wellbeing strategies into place. That’s what this young generation wants. They don’t just want their medical plan. They want to know there are all these other fun things that are attached to the benefits plan. I think that’s the way we’re trying to get these business owners to think. What else are you doing besides just giving them the medical and the dental. The amount that it’s costing these employers, it’s really sad to see. It was supposed to be affordable. How about in addition to the benefits cost directly? What has it cost your company in compliance and regulatory issues? In managing healthcare, as a business? Has that impacted you? • It isn’t cheap by any means. We haven’t broken the 50 area, so we’re still able to manage wearing different hats, trying to keep our costs in control. There’s more HR. There’s more personal talk going on. Like she had mentioned, they want to know more things about what’s going on. “How do I have this work for my gym?” “What’s the rebate?” “How does this work?” “Can you show me how to do that?” There are a lot more things that we’re spending time managing in the front office than we have in the past. I think there’s a lot more handholding. It is for the younger generation, the people that we’re training. They’re definitely tied into it. They want to know what’s going on with these things. They know they 263

have to have the health care so they’re happy to have it so they can cross that off their bucket list of things that they have to have. They maybe don’t use it. They’re using the dental, they’re not using that health care, but they’re using that gym membership. It’s kind of funny how that works. They’re not using the short-term disability. They’re not using the long-term disability. We provide all of those things but they’re not using really any of them even though they have them because frankly most of them are young and invincible at this age. • I want to interject something. I think one of the things we did that was really good, and I always get it messed up, was 128b or c, where we take out their premium value and show it on their check. They see this is what your benefits package costs you. When we sit down and talk about “Here’s the x amount of dollars you’re going to have. How are you going to allocate that?” They do have some options there, but they also get to see those costs. I always tell the story, ten years ago we were seeing 15, 20 percent increases and I didn’t know if we were at a point where we were in a recession, we raise our prices. We hadn’t had the employees pay anything at that point in time. We were making that decision. “Are we going to make that jump and ask them to do that?” That’s when we discovered this process. We said, “Okay, here’s what we’re going to pay. If you want more, it’s going to cost you something out of pocket.” By really making them aware of what those costs are, they were able to make choices for themselves inside of that. It got them engaged and then they got engaged in, “Well, gee, why are my healthcare costs going up so much? Why am I seeing a ten or fifteen percent increase? What’s the difference this year from last year?” It made it easier then to sell the process as these fluctuations happened. This year, it’s been a lot more of a burden on us from a management standpoint. We’re like you, we didn’t see much of an increase but we’ve got a small group. They’ve been pretty healthy and we haven’t had to really take much advantage of the process. When you read about the Target cyber security breach, it wasn’t through Target, it was through an HVAC provider that came in, snuck in the back door. Is cyber security a concern of people in this room? • Yes, and I can say that because just recently I, personally, went in to do my taxes on the 28th of January. The next day I got a call from my accountant who said, “You already filed three days ago.” It bounced back. • That’s interesting. That happened to me last year. • So far this year I believe 100,000 people you looked at have been hit and 100,000 they blocked. Mine was flagged and still, pending is what I 264

see when I check every eight minutes. It hurts. You’re violated. They’ve got my social, if they’re brave enough to go after, and go to the federal government. What else? Immediately, LifeLock. I got on there. Got everything set up. We even thought about offering that to our employees, as a benefit. • Even in the last six months our website has been hit twice where it’s been hacked. Content changed and second time brought down entirely. You really have to ... not being a large company we don’t have somebody working on that all the time so it requires daily monitoring to make sure that links haven’t been messed with on there. I like to think, we have IT on staff that handles the day to day things but if you’re not watching that it’s amazing how quickly somebody can give a real false betrayal of your company. Kind of overtake it. At least in the last six months, I’ve seen it twice. • That’s only part of it. It’s your guys’ information, it’s all your clients’ information and you’re held liable for those credit cards. • We’re very big on that. A lot of people pay with a purchase card now so we have to protect that stuff pretty seriously.

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FOCUS GROUPS

Winona March 10, 2016

Minnesota Marine Art Museum

Are you optimistic about 2016? • Yeah. A lot of it is reshoring, things coming back. A lot of it is the economy as a whole. • I am less optimistic than I was last year. We deal a lot with big box stores and they are scaling back. We have an international presence, especially in Europe, and with the dollar being as strong as it is, that has had a significant impact on our European business too. • I’m very lukewarm. Our business is off by 40 percent from last year. We’re being just crushed by the gas and oil situation, large clients that have virtually disappeared for six to nine months. Mining is also another significant client for us, and again mining is taking a pounding. My 2016 outlook is for some recovery, but I’m at this point estimating that maybe I’ll finish the year down instead of 40 percent maybe 25 or 30 percent from the previous years. So it is a tough slot for us right now. • Gas and oil affect our business as well, but with that being said and being down as far as it is, we are a little down. I’d say November/ Sponsor: W.P & R.S. Mars Co.

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December 2015 are generally slower periods for us, but we went through them very strong. Aside from a couple week slow down in 2016 at the beginning of the year, I’d say business has been off since then, and we’ve filled all the absence of the gas allowance-type work, and it still remains strong from all sectors, so I would say I’m in that 90 percentile. • A little bit more of treading water. We are starting to get some new opportunities, but overall, pretty flat. I was with the reshoring, we have seen some of that, but I’m getting pressure from large customers that are now looking to offshore more again. Just last week, my largest single job ends up in (name) lawn mowers. Zero-turn radius. It goes in the big weldment, and we have had it for four years. Our customer that does the weldment assembly has had it for eight or nine. It just came up a couple weeks ago that the fire sale out of Asia, the prices are coming down significantly. Part of that is they have China and such, but the thing here is that they are slowing up, while they have a tremendous amount of product becoming available. So that is where the gap had been narrowed quite a bit with reshoring, and the quality concerns and all that. But they had two or three different customers kind of float that, “Hey, we might be up to something,” or they might be up against us again for next season. So I get a little bit worried about that. • For us it is sector specific. So with the steel industry being so depressing, the early Minnesota mining region is tough. Our largest customer is (company), and eight sectors now at 50 percent, so that has been difficult but everything else for us, medical devices, general manufacturing, aerospace...most of the foundries we do business with are going strong. In this year’s poll 90 percent of manufacturers are optimistic about their prospects, but are very cautious about the economy. Is that an anomaly? • I feel my customers are uncertain. Myself personally, I don’t want to go have a bunch of large capital expenditures. I don’t see a lot of people wanting to put the risk out that far. Anyway in manufacturing, we have been up against that for years. No one really wants to extend themselves much, but there is certainly less capital expenditure from what we have seen. • I have seen that too. As far as capital equipment, investment is way down. That used to be a big part of my business, tooling out new machines, and there just seems to be an uncertainty out there, guys just kind of hanging in the weeds right now, until they’re a little more sure of some 267

major factors like healthcare. Well, the burden has been put on a small business. So I just see a lot of guys that may have some money in their pocket but don’t really want to spend it. They are kind of waiting. • I think in general, most people are nervous, unless they’ve got a real niche thing, a real niche product, they are different from everything else. If they are the job shop type of deal where the workload can be erratic. But for the most part I just don’t see a lot of capital equipment investment going on out there. • It has changed a lot since 2008. I think people have a longer memory and they remember 2008, I don’t think everyone is confident that the issues that created the financial situation in 2008 are all fixed, and so they are very sensitive to every little thing that happens, whether it is to do with the economy or anything. So I think people have to be much more confident and see a much longer picture than what they did before that. • The bulk of my business is with small OEMs and they seem to be more hesitant. I don’t hear a lot of optimism from that group of the economy at this point in time. I hear generally in the news “the economy is kicking off” and I certainly don’t see it. You mentioned foundries that were busy? I don’t know foundries that are busy anymore. I guess maybe there are niches. I know some automotive folks who are doing pretty well because of the vehicle sales, but in general, all the foundries that I talk to are struggling right now. Do you operate your business differently after the experience of 2008-09? • For sure. We watched how we hire people, made sure that we are staying as slim as we can, but we have also had some really good years so I felt that we, as a company, have gotten a little fatter again. Not just personally. So now that we are stepping back again, we have been growing at 20 to 25 percent a year over the last few years. Things are slowing down, it means that we are not seeing the significant growth that we had, or the opportunities; or those opportunities, we have to buy the deals now and we are afraid to do that, where before, we would do that. If I recall, you used the recession to diversify what you were doing, right? • Right. So that helped us. In 2008 we were manufacturing equipment, and today we are still manufacturing recycling equipment. When it slowed way down we thought, “there is still equipment that needs service,” so we expanded into providing customer service. So now we have the case 268

of employees who, even though our equipment side is down, we are spending and doing more service, repairing repairs all over the country for our customers. Also, we got into looking at data for our customers, how to provide that. So we did know in 2008 that we cannot live with the equipment alone, manufacturing alone. We will make more money this year in our customer service department than we will our manufacturing. Otherwise, it would have been a really rough year for us. Does having it being an election year matter? • I don’t think it matters in our business. • It is a weird political year, to be sure. • I think a lot of the hesitancy and a lot of people from my position and my peers are absolutely ... there is hesitancy on how this election shapes out. Whether it is real or not, the perception drives the actions. If there is hesitancy, I think absolutely how an election shapes out will contribute to how people ... whether actually in the end it changes anything in their business. • We are in a better position because of it, undoubtedly. It wouldn’t take a lot of lack of capacity to go ahead and start looking at a new piece of equipment and make the decision to go ahead and buy it and run it, where now we try to utilize our capital equipment more. We are trying to lean on other sources to handle those up and down times. I think it puts us in a better position in the event of another financial crisis or something like that. I think that is why overall, capital equipment purchases, things like that, people have to be much more assertive in this day and age before they make that kind of commitment. Is anybody here holding off on capital expenditure just because you are hesitant about what might happen to the economy? • Absolutely. I took ownership of this business in 2013, and my strategy has been cash conservation since then. There are things that we could have invested in that, rather than invest in the capital, I have gone and found outside sources for. So I am flexible with, fortunately, with the business level that I talked about earlier, that I haven’t got a big chunk of capital that is sitting idle now for some of those activities. • I think from the human resource standpoint too, I think when 2008 hit, the bottom companies had to let go of 20 percent of their workforce. What I have seen happen is they have made do with the 80 percent that was the remainder, and as things kind of ramped up in certain areas, they haven’t 269

replaced those people either. • People are more productive. They figured out ways to be more productive utilizing equipment better, workflow, new technologies. So now that things are looking pretty good and they want to get more people back, now they are struggling to get more people to come back in. So they are just doing more with less since 2008, and I see that everywhere. What about the skills gap? Is that still a challenge? • It is very difficult. We are much different than what everyone else is saying, we have been trying to hire for a couple years and we are spending a lot of money in capital. It is almost impossible. Skilled workers or entry level? • Skilled and non-skilled, it is almost impossible to get people right now. I think a lot of it has to do with wage lanes that they are in. You bring the non-skilled, they can make more with freebies from the government than they can working. So they choose to stay home and take money from the government. • We just can’t find anyone. Obviously we are looking for a particular skill set, being a tool shop. We are looking for a machinist. There are so many things that we could discuss with regard to higher education and the issues that are involved with all that. I think we need to make a commitment to the trades at the middle school and high school level, which is gone. I think it is gone due to funding. Obviously there is capital equipment involved with having a machine shop, or a welding shop, or something like that in a high school. So those are the easiest to program. • I wonder if it is funding or if it is a pervasive attitude that everyone needs to go to college. • It is both. There is no question it is both. It is both for sure. • Vocations are not valued like they should be. • They should be. I have a son who just graduated and enrolled in Winona State for the first semester this fall, or last fall, and didn’t learn until after probably the first month and a half that he really had no interest in going to college. He liked what we did at our shop and wanted to be a part of that. But just the social pressure and pressure from us parents, teachers, everybody that if you really want to amount to something you have got to go to college. You have to go get a four-year degree. Which is 270

just wrong, I think. Particularly right out of high school. • Vocation is an education as well. • They spend so much more time deciding what school they want to go to, and they don’t even know what they want to go for yet. They don’t even know why they are going to the school they are going to, they are just trying to pick a school. When some of that time should be spent trying to decide what they want to do. I mean having a son who just graduated last year, they do have more career oriented classes and programs for kids to participate in, so that does help. • They do some testing that helps them identify the skills and the traits that they have that maybe they can excel in those areas. So they have done things to do that, but I think they just need to readjust their focus and help kids understand that you have time to make a decision, and there are options that allow you success other than going to school for a four-year degree. There is nothing wrong with working a little bit, there is nothing wrong with going for a trade, getting involved and deciding from that level whether you want to go for a higher education beyond that. • I think as employers we could do a better job at saying, “We are hiring people at lower levels,” and helping some of those people as we recognize their skill set to go and get a higher education and help them fund that. So many of these kids are so far in debt when they graduate, they are never going to make enough money to pay it back. Do you have a pipeline at all with the school? • No. I have talked to the vocational school at times. They lean on us for information and stuff, but no, not with the school. It is sad. I learned what I wanted to do in high school, and I didn’t know until I went through the industrial arts program. At that time, they only had a two-year program, you go one year and then you have advanced machine shop class, and I had to go from 10th to 11th grade. In 12th grade, I remember going to my counselor saying, “I love this, this is what I want to do when I graduate. Is there something I can do to learn more?” They actually allowed me to go another year and participate and take a more advanced course, because I knew that is what I wanted to do. Now kids just don’t get that. They don’t get that opportunity. • Along the same lines as the four-year degree, I think the two-year degree is not marketed very well. It is like, “Well, if you go to a four-year degree, you can make 100 grand a year starting day one out of college, but 271

if you go to a two-year vocational school, all you are ever going to make is 15 bucks an hour.” It is so not true because there are so many other facets rather than learning how to run a machine. Well okay, now you get into computer software, now you might be a computer software salesman for machining, so there is a lot of upside to the vocational program that I just don’t think is marketed at all. A kid thinks of a two-year program. A lot of kids think, “Well jeez, everybody else is going to a four-year so I am kind of inferior to that,” when it couldn’t be more wrong. So I think there is a real lack of marketing and what you can get with a two-year degree. You can go to Winona, you can go to VoTech out here; two years, 14 grand, you graduate and you are on your way. • At state universities, that is true. If you look at the budgets for the fouryear institutions versus the two-year, from a manufacturing standpoint, the money needs to be spent towards the two-year school because that is where we need it. The tradesmen. We just keep pumping out graduates who are coming up out of debt and $30,000 a year jobs are probably all that is available to them after college, for a vast majority of them. What about the readiness of employees to work, regardless of their skill level? • We have a lot of welders. We look at them in high school. We work with our local high schools, and make sure they have a welding program, help support that, bring people in. We talk to these young people, and say, a four-year school, there’s not that many opportunities for us. If you want to come to us, and you have some aptitude, you know they’re out at the farm, we can teach you how to weld. • We say, “If you go take this semester, and we’ll pay for them.” We’ve just been really fortunate that we’ve hired 20 people in the last two years. I guess part of it is the culture. We’ve been around for 55 years in our communities. Still, we’ve been really fortunate. How do you keep them? • We’ve looked at innovative ways: We’re opening up a daycare center now for our employees, and our community. It really liberates kids and young families now for the daycare. Kids are right across the parking lot from us. We pay a lot of money for health insurance. That’s everyone’s big concern, so I’m willing to contribute a lot to make health insurance affordable. I don’t know how much longer we can do it, but just looking at things that really makes their lives easier. I always tell them it’s an hour to La Crosse, an hour to Rochester. Hour to Austin, Albert Lea. You’re driving two hours. If you look at your hourly rate, and have ten hour days instead 272

of eight, plus your gas, plus going out. What is that really costing you, and time away from your family? What about the soft skills? • That’s one of our biggest issues. The last Monday and Tuesday have been so nice out. Fourteen percent of the people didn’t show up to work. When you’re talking 650 people, 14 percent not showing up. Calling in and saying, “We’re not coming in.” They don’t care. They don’t care if they don’t. “Well, it’s an occurrence. No big deal. Let me go for three more days. It’s nice out.” That’s the kind of attitude we’ve got. You talk about the math skills. I can attest to that. We probably have the exact same thing. It’s at least 40 percent we’ve got to teach remedial math. • Give me a kid with good work ethic and decent math, I’d rather train him than have him go to a school. Some people say that a growing part of the skills gap has to do with population. There are fewer and fewer kids out there. • When we look back over the last couple decades of manufacturing, it seems that for every business, any initiative needed to be properly supplied with people. Whether you’re talking about “I need to do more volume,” or “I want to expand into a new market,” or “I want to do it on the new technology.” It all had to do with “I need to put the people behind it” to get that to happen. Part of what you’re all talking about is that people aren’t an option for us. What are the alternatives? • We focus on four pieces. One of those pieces was strategy. The reason that was important was because everybody we have employed at our manufacturing facilities stays there because of something that they see in the business that they want to be a part of. Our ability to talk strategy and vision about where we’re headed and who we’re going to serve, and what we’re trying to be, is an important part of retaining those people as well as helping them understand what it is that we need them to develop. Which is the second point. Talent. It’s at every level that you’ve been talking about. It’s the essential skills. It’s the technical skills. Quite frankly, it’s the leadership skills. Sometimes what we find is poor leadership skills will turn people out and obstruct initiatives within the business as fast as anything else will. A third piece is continuous improvement, which you’re all very familiar with. We have to get more out of everything that we do. Everything has got to be more productive. Not just the stuff on the floor, but everything in the office, everything in our sales room teams. Everything in the way that we market, in the way that we engineer. All has to be more 273

productive than it has been, because we can’t throw people at it. We have to get more out of them. The fourth element is the management system. The elements, the structure in place to be able to plan, control, monitor, promote innovation, needs to be solid and all linked together. For us, we like ISO as the infrastructure for a strong management system. What about strategy? How important is a formal strategic plan for your company? • We’ve done it more over the last seven years. It is a very important part of who we are and where we’re going. We took steps to double our business in five years. What we had to do to make sure we can do that, and make money doing that at the same time. It’s given us a road map that we have followed for the last three years and we’ve doubled our business instead of in five, we did it in three years. We’ll probably double it again in another three years. It’s very strategic. Most importantly, it included not just four people in the office, but we reached out to people on the production floor to help put this together. We were all on the same page. People on the production floor were as important understanding where we’re going and what we needed to do, so they participated. • Maybe it’s a little different in the Twin Cities. There are just so many places to work. So many options for employees. Then with the millennials coming in to the workforce, we’ve found that if we at least pretend like we’re on a move, have a strategy we can connect the younger people in our workforce to to be a significant part of that strategy, then they’re into it. • That strategy for that reason alone, for employee motivation and retention, seems to be good. Obviously strategy’s good to have anyways, although the playing field changes all the time. So does the strategy. • Always know the three and five year. Let’s talk about other ways to retain employees. What’s the magic? • Other than throwing more money at them, it’s tough to deny them making a leap. • We’ve had more success, just like he said. Both growing our employees than we have finding them out of tech school, or getting somebody with experience from another company. It seems like in our trade now people develop very good skills in a very specific, narrow area. Not as well rounded and I blame that partially on vocational schools and the programs that they lay out. I think sometimes they’re influenced by local manufacturers because they’re the biggest employer or whatever the case 274

might be. The funding’s down. They don’t fund the program or whatever. That’s too bad. I think that they should have a common regimen that they go through for the program. More well rounded. We go and hire somebody who has worked eight years somewhere else and been very successful. You bring them in, and you find out they really only knew one thing. They were very good at that for who they were working for, but that doesn’t work for us because we do a lot of different things. • Getting people with a strong mechanical aptitude, they’re good workers, good reliable people, bring them in. We train them. We try to give them a well rounded education in our shop. I think we involve them. We’re a smaller company. We’re only 15 employees. • We involve everybody in everything we have going on. I think they like that. They feel like they’re a part of the whole company in our success or our failure. They take things personally when they don’t go well. Also, when we train people like that, whether it’s a good thing or a bad thing, I think they feel like as long as we take good care of them, they’re less likely to go somewhere else. They learned everything there, and they feel like they can excel here. They can grow here. They know what we do very well. If they go somewhere else, they don’t. The lack of a formal education I think sometimes makes them more dedicated to you. How important is that sense of loyalty? Is it more important than a couple bucks an hour? • I think it’s very big. More important than money, people want to be fulfilled and satisfied, whatever it is. Two of the things that I heard I guess a couple times are interested involvement. You want your employees to know that you’re interested in them and get them interested in what you’re doing, and in some level of involvement. In a 15 or 30-person company, you’re not going to have a bunch of supervisors. People can have more responsibility. You can add more responsibility in your small sphere and giving people that responsibility and recognizing it, and let them exercise it. I think it ties people to the experience. They tend to want to stay where they feel fulfilled, recognized, and appreciated. Let’s talk about health care. Is it still a big issue at your company? • I don’t know if my employees know what to think because I haven’t forced them to go look at the marketplace. Our insurance has gone up 60 percent in the last three years. We’ve had to go from a couple thousand dollar deductible to a $6,500 deductible. We absorb a large portion of that deductible. Because otherwise, I think my folks would say I just can’t, I can’t do it. I look at what I make. I can’t be in a situation where if 275

something bad happens to me, I’m bankrupt. Do they know that you absorb the increase? • Yes. We make it very clear in our yearly presentations of what’s happened. What’s happened to the cost, what portion we are covering for them in the event something really bad happens, they don’t get destroyed. Frankly it’s cost us a lot of money. It’s something that I thought I needed to do in order to keep the core, skilled employees that I count on inside of my walls. Do they appreciate it, or do they take it for granted? • I believe they appreciate it. I’ve had a number of people come back to me and say I’m certainly lucky that I was in that situation. That saved my life so to speak. • It can be used something for retention. Unfortunately, I get caught in viewing it just as cost. Especially when it’s going up and service is going down. I’m fortunate that, not fortunate, but not all my staff utilizes what we offer. Are you ever tempted to pull the plug on insurance—give the money to employees and let them fend for themselves? • I’ve looked at those numbers, but I couldn’t come up with an agreeable way in my mind that made that work. It’s how do I do that equally to the guys who have given me more service than other years? Other than the same we’ll make a flat contribution to whatever plan you do across the board. The guys have worth more to me to somehow get a better something out of that. • You do just come very transparent to the cost of our whole package and what we contribute versus the employees. Our insurance just went up 26 percent this year. • I have to compete with other people to provide the health insurance. It was just time for me to let them know, and they appreciate it. You know, how much it costs, they really appreciate it how much it could cost them. When they go out and look at MNsure, or something, the cost. It’s really good for them.

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FOCUS GROUPS

Owatonna March 10, 2016

Southern Minnesota Initiative Foundation

What do you think about your prospects for 2016? • I would say I’m 80 percent on my own business and I’m always more optimistic on my own because I feel like I have a lot more control over that. As an overall economy, I have some concerns. I don’t know that I would be quite that optimistic with that with everyone, but definitely feel like stuff that I have. • We’re primarily in home construction remodeling, that kind of stuff, so yeah our market sector is definitely more stable now that it has been in the past. Definitely still not as stable as I’d like it to be, but definitely better. • I think I could echo what he just said. I feel more confident in our company than I would for the sector as a whole. • We’re going to be flat, but I think long term we’re going to be in pretty good shape type of thing. • Yes, I’m in ag. I’ve got three different sectors. The ag sector sucks because of the high dollar. I don’t know if you looked, but it’s a balance of Sponsor: Southern Minnesota Initiative Foundation

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payments on agriculture, but it really has changed a lot from last year, this year, and the year before. I think it’s all pretty fundamental. I have a little bit of confidence that may improve, but I think we’re in a two, three year, pretty much flat. The other two sectors I’m in, the technology sector and the real estate sector are still good in terms of performing. • What I’m starting to see is greater confidence in the EU. The EU went through a big adjustment where the euro is now pretty much close to parity to the dollar where it was traditionally at 1.25, 1.30. They were getting hits in Europe where I think when they say the euro fell as fast as it did to American billed product that that affected them. I think that’s been reconciled out with the psychological barriers if nothing else. I think European sales are starting to improve because European confidence may be a little, I’m not sure it’s higher, but at least it’s reconciled to new equilibrium. That’s probably the biggest economic change that I’ve seen. I doubt that’s pretty much everybody else here, but I noticed. Do you operate your business differently because of your experience in 2008-09? • Yes. In 2008 we took the time to become ISO certified. After we completed that, we took some lean training so we are running extremely lean. We’re starting to turn actually some black ink at the end of the month after seven months of red. Took some adjustments to do that, but we can do it and I know it’s repeatable. I invested heavily after 2008 in modernizing my shop so that I can meet my customer’s demands. Now I’m certainly hoping that we get more than five years of a good economy, so that way we’re a little bit cash tight, but we’re doable. • In my case, I had just built a new facility. It’s about a year old so it couldn’t have come at a worse time. We moved in January 2007; in 2008 it fell off the cliff. I was probably really happy that I was as conservative as I was, because if I hadn’t been, I would have been in trouble. I did anything that’s significant, it’s how I utilize my work force. We had to lay off 11 out of 25 people and, of course, the ones who stay are your most versatile, ones willing to cross-train. We just took the time as things started building back up to train everybody like that so that I have a much better workforce than I’ve ever had. Partly because we took the time to cross-train everybody and if they weren’t willing to fit that role, then they probably weren’t willing to stay, so that got better. • Our peer group’s been around for a long time. Most people in the room, we’ve known each other for quite a while. One of the things that I took from this whole recession thing is that every one of our companies 278

survived and almost all of us took some pretty serious bullets. Some of us were on life support perhaps. None of us would want to go back to those recession days, trust me. I think there were a lot of questions that were asked of, “Okay, what I’ve been doing up to this point isn’t going to work right now. What do I have to do?” And there were people who refocused whether it be cost cutting, which probably everybody did to some degree. But also looking at how to be more competitive and how to find and expand into the niches and maybe learn it. Everybody had to get a little agile from that too so in that sense, that was good, but I’ll guarantee it. Nobody wants to take another bullet. • I think the advantage we have, too, though is that we’ve all seen that bullet. We know what it looks like hopefully before it hurts you. For me anyway. • He was in construction. He took three. • Right. Took three. Two in the head, one to the heart. • Yet here you are. • Good thing nothing important was hit. Is that why manufacturers are so confident about their prospects, even though they have doubts about the economy? • I’m more confident about how we learn to better manage mental services and our ability to take that bullet. I’m still not very sure about the economy. I can’t jump on that bandwagon and say, “Yeah I’m 80 percent sure that things are going forward.” I have not been comfortable since the recession as far as how things have really felt. Part of it, I tell you, is our political landscape and it constantly seems to be about parties fighting each other than getting somewhere. • Most of us are entrepreneurs and not professional managers. If you’re an entrepreneur, you’re probably an optimist in general. We started living our little delusional world through those colored glasses and we all pretty much have those here. I think you have to always discount what the entrepreneurs say a little bit because we believe our own bullshit. • Not measurable. • Pretty cheap psychiatrist.

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• Unmeasurable. • It’s probably more benefit to the couch aspect in some ways, I think. Because most of us, this is our advisory board, most who don’t have formal boards. So in some instances this is a formal advisory board and sometimes it’s like, when you’re taking a bullet and you’re bleeding and the guy next to you, he’s got gauze over his stomach too, I think that helped a little bit in that sense. • Well, not just bleeding, you’re causing other people to bleed. You’re laying your employees off, you feel like crap. How much do politics or elections contribute to the sense of unease? Do they affect how you run your business or how you project how you plan? • I think it affects the confidence I have going forward to take on more debt. If keeping this economy moving is about people buying machines and adding services, it makes me far more hesitant to do that just because of that political landscape. How long do we have to go over private parties fighting each other before we start to get some common ground and move the whole ship board? It’s been going on a long time. I think that I take less risk because of that. • It’s the whole government working together. • Yeah, I think it’s not party, it’s about both. • I went to war with a bank in 2012, my taxes were higher than my bank loans said, and they were going to shut me down two years earlier. (Name) went to war with banks, a lot of us went to war with banks, and some of them were going to war with bank regulators. In all fairness to the banks to some degree, they were getting jerked around in their own way. To me, that was maybe one of the bigger ramifications of the recession and how we dealt with it. • I’m not really willing to blame. You might blame, depending on your politics, you might blame Bush people for getting us into the economic situation, but the recovery, I think everybody gets the blame on how they handle that. • We talked about this earlier today; things that we control. We can’t control always the big things, but we can control the things we can control. I look at my business, I think I can make my thing work in whatever world 280

I’m stuck with and I’ll make it work somehow. • Well, other things that the government affects how we think about our business and how we plan our business, the tax rules section 179, many times aren’t decided until after the first of the year. • But it was a moving target. You couldn’t plan things. The way the government intended us to plan. He used section 179 for companies to expand, etc. But if you don’t pass the rule until after the tax year is over, what good is that? Essentially, no matter who’s in government, no matter which party’s in government, no matter which mix of parties are in government, I think that’s all anybody wants to do is understand the rules and make sure those aren’t moving targets. Then you can develop a plan no matter who’s in office. • I’m in agriculture, livestock agriculture, and we have an amount of regulations coming down on us. We’re getting our antibiotics taken away from us. The animal rights people are driving legislation, ridiculous things. Which has been actually a boom for our technology company on the poultry side because the movement to go to cage-free egg laying, actually there’s more death loss on the animals and a higher cost to production. • Then on the labor thing, the big thing is that regulation, and regulation comes in labor too because we’ve got one party that wants to shut the border down, build a wall. We would have a livestock crisis within months if there was no flow of labor across that southern border. Most of our packing plants use Hispanic labor. A lot of dairy farms especially, but our hog farms too. There are no people out here who want to do those jobs. We would have to double wages at least to try to attract people and even then I’m not sure we could get them. One thing that may be outside your control is qualified labor. Anyone have problems with the skills gap? • I think there is a generational problem here. People who don’t want to work that hard or don’t want to do those dirty jobs. • I just hired somebody on Monday. The biggest issue I have typically is not finding reasonably skilled, smart, but jobs I can skill up myself with. I hire for natural skills. Initiative, smarts, those kinds of things where I don’t have to have specific training for some people. • My biggest problem is that we educate immense number of foreign students in our universities with master’s degrees and engineering sciences, 281

etc. Then we make it almost impossible for us to hire the same people. We’re basically training up our competition for the future. We’ve got first round draft picks and we’re saying we won’t let you play. That’s bizarre. What’s the fix? • Because there’s always the angry person who thinks that if I hire this foreign person, I’m going to hire them for a lot less money, but that may not be true at all. In fact, by law it’s not allowed, but let’s say it was. But I think it’s like any other union. I mean, why don’t we have enough doctors? Because the AMA is the most powerful union in the world. Right? Why we have high medical expenses in part? Same thing happens with other professions. It’s the same argument that union workers would make with free trade in other countries. But the reality is that the world is flat whether you’re in southeast Minnesota or whether you’re in Bangalore or whether you’re in China or anywhere else in the world. Your customers and your competition, they’re everywhere. • I hire some of those people that you read about in the papers that are tough to find. I’ve got welders, I’ve got metal fabricators, I’ve got a drafter designer. I have probably just learned that I had to make myself a better place to work. I’ve used the hospitalization thing, even though it costs you money, I use it in my favor. I try to keep a clean plant. A plant where it’s obvious when you walk in that we’ve done a lot to take care of smoke issues. I’ve just tried to be a better place to work. When I advertise a job, I generally get applicants who are from somewhere else because of that.

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FOCUS GROUPS

Minneapolis March 11, 2016

Twin City Die Castings Co.

This year manufacturers told our pollster that they are resoundingly confident in the prospects for the companies, but far less bullish about the economy. Are you among the confident ones? • We thought we were bullish going in. Seventy percent of our sales are outside the U.S. With the largest market in Europe and we got killed at the exchange rate. Another part we have a fair amount of analytical instrumentation in the oil and gas market and of course, those both kind of went off the end of a cliff right at the beginning of the year. • I would have said bullish going into the year but obviously it didn’t work out that way. • We were bullish and we had great expansion at the end of 2014 which we started to see the benefits of in 2015. We almost doubled the size of the company with a large acquisition. Had to have a whole lot of confidence going into that kind of commitment and it’s worked out very well for us. • Same and very strong. A lot more competitors came to our marketplace so it was a little tougher than we anticipated but significant growth. Sponsor: RSM

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• It’s going to be a slow time in ag for a couple of years, if you’ve been in ag for a long time. We actually do all of the roof inserts for (name) tractors and combine harvesters. As you can see, as that market goes up and down and ebbs and flows, they are starting to move into different marketplaces to expand their footprint as well, so hopefully, that will counterbalance some of the traditional ag work. • We went in rather bullish and it turned out real spotty. We have about six different business units and two of the business units fell on their face pretty badly. The hydraulics, hose, and coupling business, the ag, and oil, and distillery related, missed their number by 25, 30 percent. The rest of them kind of held their own. We missed our number by about 15 percent last year. • We had a good year overall, ourselves. We’re about 50 percent in automotive. Kind of a rising tide lifts all ships there, but revenue was up, profitability was up. We were happy with last year. It was a great add-on to what our plan was, which was somewhat aggressive from the previous year. What about this year? • I’m going to partly answer the first question. In 2014 we had a very strong year, budgeted pretty conservatively going in to 2015 and exceeded that pretty remarkably. For this year where it’s fairly conservative and out of the gates, we’re tied to multiple industries so we get little telltale signs based on electronics and retails. We get different signals; we’re not tied to one industry. I would have to say it’s pretty positive, of all of the telltale signs for the first two months this year, we already exceeded our budget. I know it’s a mixed bag. I’m still not quite bullish even though the results for the first quarter appear to be up. Are your customers hesitant? • Twenty percent of our business is tied to Asia. I mean we’re selling into Asia, both retail with all the Chinese, Japanese, Philippines, specifically (name) stores and they’ve been moderate. We don’t even bring it here and assemble it, except we’re not going to bring it here or manufacture it and send it there, so we do it there. Again, the stress is over there. We have offices in China. It’s slow, domestically in China. So there are some really mixed signals out there. I’m less optimistic. I’m not as bullish perhaps, the results have been so far. We’ll see. Moderate, I’m not suggesting we’re about to change. If you listen to the news, don’t do it. • We’re a little more conservative this year than last year. Last year was 284

one of our best years. We’re solely dependent on housing. We’re seeing interesting things. There are a lot of permits being pulled but the labor can’t keep up with the building that’s going on. Usually this is our downtime and now we are seeing these kind of surreal erratic months the first couple, this year. • We’re five months into our fiscal year. We’ve got some good data behind us and we have a lot of negative surprises from our customers, kind of unrelated to each other. We’re not quite sure if it’s an anomaly. Not a large portion would be related to anything going on with us, from deliveries or quality issues. Just a lot of negative surprises, we’re a little slow, this project didn’t take off. Last year, we were within a tenth of a percentage point to what our customers have told us for volume. Again we go back in August and start putting together the forecast for this current year, same customers, same customer service people, they give us the numbers and it just hasn’t materialized, five months into it. We were projecting a relatively flat, that was almost by design, so we could improve some efficiency and some profitability. It’s been down from what they have told us literally four, five months ago. They thought their volume was going to be in the year before, it was just right on. • Fifty-eight million in sales last year. We were off by $20,000 in our business plan. • It’s hard to be optimistic when you start looking at the different manufacturing indexes and they’ve all been off for months. We have some pretty close ties with some people in the machinery auction business and liquidation business. I’m telling you, these guys are so busy you can’t believe it. Companies going out of business and we’re the same way. Our largest customer in our contract machining business is the silicon wafer of the equipment manufacturing business. They were off the last two quarters by almost 40 percent. In the tech industry and then, of course, compounded by the oil industry which reaches everywhere in the manufacturing world one way or another. • If they’re segmented, they’re at risk, in my opinion, our industry is. There are states in our industry that have not bounced back since the recession. California, North and South Dakota were up for a little while. It’s not there anymore. Texas is poor because of the oil. The rest of the country is making up for it for us as an industry. Super strong in the Northeast and Southeast. Other parts of the country, not so much. • I think it all depends where you are in your marketplace. I am in a very 285

fragmented industry, there are a lot of small players that are either going out of business or joining forces with others. If you’re at that mid-size to growing, there’s a lot of opportunity. I think it’s about more about picking up market share than it is just organic growth. • I think 2009 is hard to forget. When you go through those years, 2008 to 2010, there are a lot of us who are going to be a lot more cautious. Do you think you are more agile today because of lessons you learned in 2009? Do you run your company differently? • We react quicker, now we’re more agile. We start trending the way we thought they were going to, we react quickly and don’t just think it’s a rough spot that will get better. • We got leaner but we also tried to shift as much of our fixed expenses into variables as we possibly could so we could flex up and down depending on market conditions. • Interesting time for us where we’re highly tied to the building industry and to remodel has tanked obviously so we expanded into Canada where the dollar is still one to one. It worked, the West Coast manufacturing operation went crazy on product development and it paid off because as 2010, 2011 came we had enough stuff in the hopper that was struggling to carry us forward. A lot of our customer base was just hunkering down and trying to hang on. That made it very difficult. • Another element of that recession is that nobody saw it coming. Are there factors in this economy that make you nervous? • Yes. We’re still recovering from the pitfalls of 2008 and 2009 so the resources and what we actually have at our disposal aren’t the same as they were. If we got hit again, it would be very difficult for us to weather the storm. Our model now is different, so yes, we’re actually in a better position structurally from how we’re organized. • I think that for us, it forced us to get a little bit more aggressive with goto-market strategies, sales force, expanded, more boots on the ground. You talked about the surprise factor. It forced us to improve our intelligence, go forward on key measures that we’re evaluating to see what’s going on. Hopefully we wouldn’t get caught by surprise as much or at least have incoming data to tell us what’s going on with our customers. The sales force expansion for us in investing in that model is an outcome that would benefit us going forward. 286

• We spent some time in Canada where others have failed because of the dollar. The retail sales aren’t there. We fostered the relationships and kept them going and sending additional discounts into Canada because Canada was there when we weren’t. They’ll need to be there the next time. Those who are letting Canadian business go in our market are not protecting themselves from the next downturn of the U.S. The dollar isn’t doing quite as well. Same of any exporting in the marine industry. Most of my counterparts in fiberglass still are on the downturn, they never bounced back. Our segment took their business. They then rely on exporting heavily just to keep their businesses to the dollar sales that they were. Comfortable with before the downturn. There are some segments of ours that are still down six to seven percent that still haven’t come back. • I don’t know how you prepare for a 2008. A lot of it is sheer luck. Which customers are going to hang in longer? We’re a fairly diversified corporation and even in 2008 and 2009 we had a much different timing when our businesses started to tank with the economy. Our industrial products division crashed first and it went down hard along with machine tool sales. Our contract machining stayed strong seven to eight months beyond that before it started to drop. So much of this is luck. • It’s almost like defense contracting. Defense contracting can be very, very good if you’re on the right program. You’re at the whim of the government in terms of which program they’re going to fund and which ones they’re not going to fund. You can’t always fit in the contract business; you can’t always pick your customers. Our previous owner used to talk about us as ambulance chasers and in some respect that’s what we do in the contract business. You take those people who come in, and you go after those opportunities, and some of them you land and some of them you don’t. • The one thing I would say is that for those people or those companies that survived 2008 and 2009, odds are you came out it stronger than you went in. I would say that every time we went through a downturn, we’ve added technology that has reduced the number of employee per sales dollars that we had before we went into the downturn. It creates an opportunity to lean up the workforce. Do you bring those people back? We tried very, very hard not to bring those people back and keep our workforce down. From 15 years ago to today, we show the same number of dollars with less than half the people. You just keep working at that and I would say that would be the one thing that would help going into another downturn is that if you have a smaller employer base you have less volatility in the downturn. 287

• With the next recession renewal, we’ll figure out how to weather through it. It can be difficult. Just because it’s so capital intensive. • I can say for a fact we came out smarter. I don’t know if we came out stronger but we definitely came out smarter. • Some of how we got though 2008 is rooted in scars of experience. There’s going to be a rainy day. Someday there’s going to be a rainy day. It going to be a missile shot in the Middle East, the economy is going to tank, so years ago we started communicating with our employees and teaching them about cash flow and positioning the company to weather the rough times and capitalize on the great times and that’s business. Another legacy of the recession was that supply chain relationships became tougher, more demanding. Is that still true? • No, I think it’s more the higher up the food chain you are, what you’re demanding, better terms, longer payment terms on their AP and more demanding on not only the payment terms, but the condition under which you work. Every little thing in terms of whether it be the freight cost, if you’re doing co-development, you’re much more aggressive in protecting AP all the way around. It seems they’re a little more jaded. • I definitely hear price more now than I did, let’s say, ten years ago. • Every customer I know, and I’m sure you’ve all experienced this, they want it perfect, they want it free, and they want it now. Anyone experienced that? • We’ve decided to share financials with our employee base too. We used to keep everything completely secret and quiet. There were all these little meetings behind closed doors and right now we bring it down two more layers than we did before. They get more on the waste side, they understand. On your rainy day, I think the finance companies and the banks still have their umbrellas out. • They only lend money to people who don’t need it. • Floor plan financing really carries our industry’s recreational industry so at work we rely heavily on that. There are an awful lot of product returns, manufacturers during that downturn, and for what it’s worth, those floor plan companies hardly felt it. They had it facilitated but we had to buy back the product. Thankfully, we only had a very, very small number of returns. Some of the boat companies had significant buybacks and a lot of 288

resale that they had to do with our network. They kept the dealer network at bay but really, really strong ones have a plan and a good plan but they still aren’t giving them the dollars they gave them before the downturn. The last proof that they have, they had to move to the weaker floor plan companies to be able to get through it or their local bank. Local banks are playing a part in our industry where they hadn’t before. I think it goes all the way through the retail. Retail guys are not financing recreational products and things like they want and they used to. How is the skills gap affecting you? • We’ve been pretty fortunate, I think half of those people have been there over ten years and haven’t had a lot of turnovers. We pay well and profit sharing, stuff like that, has really helped, I mean, to keep those people around. • We’re currently at the far extreme on the other side. We have 800 employees throughout our operation and we’ve got a significant number of highly-skilled people who are now at the point where they’re at the edge of retirement. They may have delayed a year or two or five because of the economy, but they are starting to drift out and that skilled employee is not coming up through trade schools anymore. The younger people who are in our operations, that’s not what they’re looking to do and so we have a serious, serious challenge. Especially in a place like (city), Minnesota where it’s just a small population and than you go to Mankato where it’s a booming environment. Then it’s competing on price and we’re a contract manufacturer. We can’t just keep escalating price because we’ll go out of business. I think that’s going to be one of our most significant challenges in the next five years. What’s the solution? • We’re trying to find partners down to the high school level. We’re working with Dakota County on a training grant to try to up-skill the internal resources that we have. We’re looking at anything and everything that we can to incent people to move into some of those more skilled positions and also building our own training programs because the schools aren’t doing it. • We’re doing the same thing. All the way down to the high school level. We’ve reached out to a number of the vocational colleges, some of the high schools, some of the universities. We’ve put out internship opportunities and we got 52 applications. It’s been pretty significant now. That’s across the board. We had some in accounting, some engineering, some in graphic design, but several of them in CNC operations which is a big part of what 289

we do. It’s not the be all and end all, but it’s a start. We’re starting to make them aim that way and get a little bit of a following, so we’ll see what happens. We’re right in the front end of it. • This is certainly not a new issue for us. We’ve filled that gap with automation. We filled it with technology and in most cases, it’s cheap compared to the employee and the training activities and so forth, but we’ve almost shot ourselves in the foot because as we’ve added technology, our workforce continues to get older. All of a sudden, you go out into the manufacturing floor and you see a whole bunch of people who look like me. You’re getting people who are in their 60s and you’re thinking “Okay, what’s going to happen in the next five years or the next ten years?” Some of those people will stick around until they’re 65, 67, maybe 70 years old if you’ve got the right job for them, but of course, you haven’t been back filling. Every time we’ve gone through a downturn and we reduce our workforce, you always lose the youngest people even though we’re not a union shop. The people who have fewer years with the company are the most likely to end up going. Even though you try to clean house and try to get rid of some of the bad actors along with the process. For years, we’ve done the high school thing and we’ve done the trade school thing. Of course, the trade schools, we’ve lost probably half of the trade schools. There are almost no machine shop programs in the high schools any more. • There are a couple of them around. Dunwoody has got a great program. Try to hire a Dunwoody grad. They’re all hired after the first year of the two-year program. • You should go to Dunwoody to really get the statistics, but a couple of years ago, and I’m a Dunwoody grad from way back when, but the statistics were amazing to me. I think I’ll have these pretty close if not exact, but the average age of the student was twenty-four years old. Over 25 percent of them already had a four-year college degree and they had 100 percent placement out of the machine shop and out of the automation program. Virtually all of them were placed in the first year of the program. • Regarding this, because my experience is very similar, we’re all experiencing the same things, exception issues, aging population. We have to train people whether, I’m not even saying technical or, I’m talking about basic skills. It really is stunning. We’re faced to deal with this ourselves and my question to you, and my guess is you’ve heard this same story wherever you go and you’ve talked to a lot more of these folks than I certainly do, what are they doing about it? They’re training themselves. 290

They’re trying to go to the high schools and the techs. You hear any great ideas? You heard anyone say “We cracked the code”? • I’ve talked to our teachers. I think high school is too late. I go to the junior high and the middle school. We talk to the industrial arts teachers. We offer tours at that level and tell them that a manufacturing job and a career puts you ahead in the end of a four-year degree because your parents are shoving it down your throat. • And your teachers. • That’s exactly what’s happening. Our teachers at that level are telling us that the colleges are sending busloads of kids and recruiting them in the 8th and 9th grade level. If you’re not in front of them by the 7th grade level telling them about how honorable a manufacturing career is, you’ve lost them. You have to start convincing their parents. I’m one of those parents. I have a son in that age group. He’s not going to sit through four years of college unless I make him do it because he’s a hands-on, innovative person. He’s money ahead in the end if he gets out and does something that is an honorable career. Something different. How do you get that message across? You have to get to the parents and you have to get to the kids early on. As far as the skilled workers, we’ve got an apprenticeship program going on. We pay while they learn. We have to provide them with the classroom time with the facility and the State is paying for all their distance, instructors, the materials and so on. We started out with 28 people and we’re down to twelve. For the same reason, they don’t like to go to school. It’s real honest college work but they’re sitting in our conference room and they’re learning how to read blueprints or taking safety courses. They are doing all the appropriate work, but less than half are willing to do the effort to do the homework to get to that next level. Now I know which ones are the best of that group, but going into it, a lot of them don’t like school. They’re there because they don’t like school. • On the other side, we’re also struggling with a shifting of the population of young people coming into our organizations. They don’t have the same kind of profile as our existing workers and I had a young engineer talking about “You actually expect someone to be there more than eight hours a day?” • I’ll give you an example of something I learned about 20 years ago. We used to be public. We took it private in 1999. I worked with a lot of outside board members. One of them worked with a lot of young people. This is 20 years ago. He said to me, “I work with a lot of young people 291

and guys like you when the north end of the building was on fire and it’s 5:00, you grabbed the phone and the garden hose while you’re calling the fire department after 5:00, you’re trying to put the fire out. It’s 5:01, the north end of the building is on fire. The young people,” this is what he said, “they look at you and go, ‘You might want to call the fire department.’ And they’re gone. That’s the difference of these age groups. We owned it. We’ll do anything. We get our hands dirty. There’s nothing beneath us. ‘It’s 5:00, I’m going home.’” The millennials have stimulated a lot of conversations in these focus groups. What’s your sense of having to accommodate younger employees? • You want me to text you that answer? • Everybody’s negative about young workers. We’ve got some young employees who are just absolutely fabulous and they bring skill sets to the table that don’t exist in our over forty-year-old workforce. The engineers who are coming in have computer skills and technical skills so they can do the work of two other people. Do they have a different attitude about wanting to work 60 hours a week? Yeah, I think they do, but I’m not sure that’s all bad either. To start categorizing an age group and saying “This is an age group of losers,” I don’t think we should be doing that because I don’t believe it’s true. They certainly are different. The kid who came off the farm and drove a tractor and worked on the farm from the time he was ten years old, we aren’t getting those kinds of employees any more necessarily. You have to look at the positive side of this thing. We try to have fewer employees because obviously it’s by far our biggest cost element in terms of running our business. Any singular cost category, employment and fringe benefits and so forth, is the driving force to success. Have you had to do anything culturally to accommodate the different attitudes of the younger work force? • I don’t know if I would say that we had to do a lot culturally. I think that the culture, I think that the employees are looking for less out of the company than they used to. We used to have almost a family environment, summer picnics and all those kinds of things. We can’t get people to even step up and really be part of that planning activity as part of the employee committees and so forth. It’s less from that standpoint than it was. I think we all have to work at trying to have a good work environment. They want to have a nice clean environment. All the accommodations and so forth, but like I said, I think these younger workers can bring a lot to the table, if you get the right ones.

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• We don’t mean to smear all the young people. I agree with you. It’s just very tough to find those. • You just have to be ready to rotate. • They are out there. We have some great people who are young and I agree with you. They are bringing skills that old guys like me just say, “Forget it!” It’s tough to find. • We want to try to keep them engaged and respect them. Again, we share financial information with our employees. We’ve done that for a number of years. They can understand if, “Well, it looks like the company’s struggling. Might not get a pay increase when we normally have it.” We try to be very transparent. Share how the company’s performing. We have bonus programs for everybody. The hourly people, productivity hits certain levels, they’re going to get a monthly bonus check. Again it’s difficult, but once you get them in, you want them to become part of the culture and feel good about coming to work every day. How important is loyalty to retaining employees? • I think there’s a point where wage is a detriment because you’re not competitive and then there’s a grey area where if I’ve got a good feel, I have a good environment, I like my coworkers, I’m not going to be as apt to move. If it’s not a fair wage to start with, it’s all about the money because they’re trying to feed their families and have their lifestyle. • One of things is that obviously these people have to feed their families and they want to have a lifestyle that they’re looking for and the thing that is really different, thirty years ago in our business, if you had a skilled machinist and you didn’t give him 50+ hours a week, he was gone. They’d go to the shop that was busy and they’d move around town because they were willing to work 50 hours and get the overtime and the parking lot was full of Cadillacs and Lincolns and ... • Buying pontoons. • With a watch. Like a ten-year award you gave them. • That was the culture. Getting people to work those extra hours to boost their income is a much different challenge today, but they still want to drive Cadillacs and Lincolns and big pickups and all that sort of thing.

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How difficult is it to find employees—any employees? • We no longer do that. If you can fog up a mirror, you can work there. We do not do that anymore. • They need a lot more training. They come out of high school and they can’t read a tape measure. We teach them how. They know more about workers’ comp and unemployment rights than they know how to use a piece of equipment. We teach them the simple math and the amazing number of young people who’ve never changed a drill bit. Their parents don’t own tools. They don’t even really know. To tell them it’s not an embarrassment that we teach them how to do that. • Once upon a time, we never would have hired somebody if they didn’t know how to do the basics. We would have tested them to see if they could change a drill bit and if they could use a tape measure. Now they just have to have a willingness to do that and learn. • I think some of them, at some level, are a little embarrassed they don’t know some of these things. • Do you find then that the twelve that are in there now, that they’re more engaged now that they’ve understood this? • The apprenticeship program. They’re for sure engaged, but I’m talking about the low skilled jobs. The plant assembly ones where you’ve got to learn to rotate. The bottom tier. They can get by with that now, we’re willing to train them. There are a lot more women and young women involved in manufacturing now than there ever were before. All our jobs are set for lower weight lifting requirements and we’re helping with hoists and more attention to detail. Without being sexist, there’s a group of women that are very viable in manufacturing and they like it because they can work the hours that their kids are at school and be back home. They don’t have that long commute.

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SELECTED CROSS TABULATIONS QUESTION 1: From a financial perspective, how do you feel right now about the future for your company... Question)1:) From%a%financial%perspective,%how%do%you%feel%right%now%about%the%future%for%your%company...

% % BASE=TOTAL%SAMPLE TOTAL/CONFIDENT TOTAL/NOT/CONFIDENT VERY/CONFIDENT SOMEWHAT/CONFIDENT NOT/VERY/CONFIDENT NOT/AT/ALL/CONFIDENT DON'T/KNOW/UNSURE

REGION REST% TWIN% OF% CITIES STATE

REVENUES LESS% THAN% $1M%2% $5M $5M+ $1M

EMPLOYEES 10%OR% LESS 11250

YEARS%IN% OPERATION

PRIMARY%BUSINESS

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

226 93% 6%

297 88% 11%

245 85% 12%

114 93% 7%

113 97% 3%

276 87% 12%

116 94% 5%

87 98% 2%

87 97% 3%

110 87% 12%

76 91% 8%

93 87% 11%

152 93% 5%

366 89% 10%

43% 50% 3% 3%

45% 43% 7% 4%

37% 48% 8% 5%

50% 43% 5% 2%

47% 49% 2% 1%

36% 51% 7% 5%

50% 44% 3% 2%

54% 44% 2% 0%

46% 51% 1% 2%

42% 45% 8% 4%

45% 46% 4% 5%

49% 38% 5% 6%

51% 42% 3% 2%

41% 48% 7% 4%

QUESTION 2: Thinking about the upcoming year, in 2016, do you anticipate economic expansion, a flat economy, or a recession? YEARS%IN% OPERATION REGION REVENUES EMPLOYEES PRIMARY%BUSINESS REST% LESS% TWIN% OF% THAN% $1M%2% 10%OR% PREC2 MET2 PRO2 1215% 16+% CITIES STATE $1M $5M $5M+ LESS 11250 51+ OEM ISION AL CESS YRS YRS % % BASE=TOTAL%SAMPLE 226 297 245 114 113 276 116 87 87 110 76 93 152 366 ECONOMIC1EXPANSION 34% 29% 29% 31% 34% 30% 34% 33% 29% 36% 28% 28% 39% 27% 46% 52% 50% 48% 55% 49% 48% 55% 52% 46% 51% 54% 40% 54% A1FLAT1ECONOMY 16% 14% 16% 15% 10% 16% 14% 12% 14% 16% 14% 15% 15% 15% A1RECESSION DON'T1KNOW/UNSURE 5% 5% 5% 6% 1% 5% 4% 0% 4% 2% 8% 3% 6% 4% QUESTION 3: How well do you feel your firm is prepared to handle [an economic expansion/a flat economy/a recession]? Would you say you are very well, somewhat well, or not well prepared to handle it? % % BASE=EXPANSION/FLAT/RECESSION TOTAL/PREPARED VERY/WELL/PREPARED SOMEWHAT/WELL/PREPARED NOT/WELL/PREPARED

DON'T/KNOW/UNSURE REFUSED

REGION REST% TWIN% OF% CITIES STATE

LESS% THAN% $1M

REVENUES

EMPLOYEES

YEARS%IN% OPERATION

PRIMARY%BUSINESS

$1M%2% $5M

$5M+

10%OR% LESS

11250

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

216 96%

282 92%

232 92%

107 93%

112 99%

262 92%

112 94%

87 100%

83 96%

107 95%

70 95%

90 92%

143 97%

351 93%

45% 51% 3%

42% 50% 7%

37% 55% 8%

42% 51% 4%

53% 46% 1%

40% 52% 8%

44% 49% 6%

50% 50% 0%

41% 54% 4%

46% 49% 4%

40% 55% 5%

44% 48% 6%

39% 58% 2%

44% 49% 7%

0% 0%

1% 0%

0% 0%

2% 0%

0% 0%

1% 0%

0% 0%

1% 0%

0% 0%

2% 1%

1% 0%

0% 0%

% % BASE=TOTAL%SAMPLE TOTAL/PREPARED

REGION REST% OF% TWIN% CITIES STATE

LESS% THAN% $1M

REVENUES

EMPLOYEES

YEARS%IN% OPERATION

PRIMARY%BUSINESS

$1M%2% $5M

$5M+

10%OR% LESS

11250

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

226 92%

297 88%

245 87%

114 87%

113 98%

276 88%

116 90%

87 100%

87 91%

110 93%

76 88%

93 90%

152 91%

366 89%

VERY/WELL/PREPARED SOMEWHAT/WELL/PREPARED NOT/WELL/PREPARED

43% 49% 3%

40% 48% 7%

35% 52% 7%

40% 48% 4%

53% 46% 1%

38% 50% 7%

43% 47% 5%

50% 50% 0%

39% 52% 4%

45% 48% 4%

37% 51% 4%

43% 47% 6%

37% 54% 2%

43% 47% 7%

DON'T/KNOW/UNSURE REFUSED

0% 0%

1% 0%

0% 0%

2% 0%

0% 0%

1% 0%

0% 0%

1% 0%

0% 0%

2% 0%

1% 0%

0% 0%

2950%

% % BASE=EXPANSION/FLAT/RECESSION 216 TOTAL/PREPARED 96%

282 92%

232 92%

107 93%

112 99%

262 92%

112 94%

87 100%

83 96%

107 95%

70 95%

90 92%

143 97%

351 93%

VERY/WELL/PREPARED SOMEWHAT/WELL/PREPARED NOT/WELL/PREPARED

45% 51% 3%

42% 50% 7%

37% 55% 8%

42% 51% 4%

53% 46% 1%

40% 52% 8%

44% 49% 6%

50% 50% 0%

41% 54% 4%

46% 49% 4%

40% 55% 5%

44% 48% 6%

39% 58% 2%

44% 49% 7%

0% 0%

1% 0%

0% 0%

2% 0%

0% 0%

1% 0%

0% 0%

1% 0%

0% 0%

2% 1%

1% 0%

0% 0%

DON'T/KNOW/UNSURE REFUSED

% % BASE=TOTAL%SAMPLE TOTAL/PREPARED

REGION REST% TWIN% OF% CITIES STATE

LESS% THAN% $1M

REVENUES

EMPLOYEES

YEARS%IN% OPERATION

PRIMARY%BUSINESS

$1M%2% $5M

$5M+

10%OR% LESS

11250

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

226 92%

297 88%

245 87%

114 87%

113 98%

276 88%

116 90%

87 100%

87 91%

110 93%

76 88%

93 90%

152 91%

366 89%

VERY/WELL/PREPARED SOMEWHAT/WELL/PREPARED NOT/WELL/PREPARED

43% 49% 3%

40% 48% 7%

35% 52% 7%

40% 48% 4%

53% 46% 1%

38% 50% 7%

43% 47% 5%

50% 50% 0%

39% 52% 4%

45% 48% 4%

37% 51% 4%

43% 47% 6%

37% 54% 2%

43% 47% 7%

DON'T/KNOW/UNSURE REFUSED

0% 0%

1% 0%

0% 0%

2% 0%

0% 0%

1% 0%

0% 0%

1% 0%

0% 0%

2% 0%

1% 0%

0% 0%

QUESTION 4: As you look to 2016, do you project your company's gross revenues to increase or decrease compared to 2015, or will they probably stay the same? YEARS%IN% REGION REVENUES EMPLOYEES PRIMARY%BUSINESS OPERATION REST% LESS% TWIN% OF% THAN% $1M%2% 10%OR% PREC2 MET2 PRO2 1215% 16+% CITIES STATE $1M $5M $5M+ LESS 11250 51+ OEM ISION AL CESS YRS YRS % % BASE=TOTAL%SAMPLE 226 297 245 114 113 276 116 87 87 110 76 93 152 366 49% 38% 37% 48% 47% 41% 49% 47% 43% 45% 32% 55% 59% 36% TOTAL/INCREASE 9% 16% 12% 9% 17% 12% 12% 17% 14% 9% 15% 14% 5% 16% TOTAL/DECREASE INCREASE/BY/MORE/THAN/10% 28% 22% 22% 28% 20% 24% 25% 25% 23% 23% 21% 36% 37% 19% INCREASE/BY/LESS/THAN/10% 22% 16% 15% 20% 26% 16% 23% 22% 20% 22% 11% 18% 22% 17% DECREASE/BY/LESS/THAN/10% 5% 7% 5% 3% 10% 4% 4% 11% 9% 5% 6% 4% 2% 7% DECREASE/BY/MORE/THAN/10% 5% 9% 7% 6% 7% 8% 8% 6% 5% 4% 9% 10% 2% 9% 41% 45% 51% 41% 37% 46% 39% 34% 40% 46% 53% 31% 37% 46% STAY/THE/SAME 1% 1% 0% 2% 0% 1% 0% 2% 3% 0% 0% 1% 0% 1% TOO/SOON/TO/SAY/DON'T KNOW REFUSED

QUESTION 5: And, as you look to 2016, do you project your firm's profitability to increase or decrease compared to 2015, or will it probably stay the same?

REGION REST% TWIN% OF% CITIES STATE

REVENUES LESS% THAN% $1M%2% $1M $5M $5M+

EMPLOYEES 10%OR% LESS 11250

YEARS%IN% OPERATION

PRIMARY%BUSINESS

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

% BASE=TOTAL%SAMPLE TOTAL/INCREASE TOTAL/DECREASE

226 38% 10%

297 34% 13%

245 32% 13%

114 37% 10%

113 39% 11%

276 35% 12%

116 37% 12%

87 42% 12%

87 44% 7%

110 37% 9%

76 30% 14%

93 33% 14%

152 44% 4%

366 32% 15%

INCREASE/BY/MORE/THAN/10% INCREASE/BY/LESS/THAN/10% DECREASE/BY/LESS/THAN/10% DECREASE/BY/MORE/THAN/10%

24% 15% 6% 4%

17% 17% 4% 9%

19% 13% 7% 6%

17% 20% 6% 5%

19% 20% 2% 9%

19% 16% 6% 7%

19% 18% 5% 7%

21% 20% 4% 8%

25% 19% 5% 2%

17% 20% 7% 2%

13% 17% 6% 8%

21% 12% 4% 10%

28% 16% 2% 2%

16% 16% 7% 9%

STAY/THE/SAME

51%

53%

55%

52%

50%

53%

51%

47%

48%

54%

56%

53%

51%

53%

TOO/SOON/TO/SAY/DON'T KNOW REFUSED

0% 0%

1% 0%

0% 0%

1% 0%

0% 0%

296

QUESTION 6: And, as you look to 2016, do you project your firm's capital expenditures to increase or decrease compared to 2015, or will they probably stay the same?

REGION REST% OF% TWIN% CITIES STATE

LESS% THAN% $1M

REVENUES

EMPLOYEES

YEARS%IN% OPERATION

PRIMARY%BUSINESS

$1M%2% $5M

$5M+

10%OR% LESS

11250

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

% BASE=TOTAL%SAMPLE TOTAL/INCREASE TOTAL/DECREASE

226 25% 20%

297 23% 23%

245 21% 18%

114 31% 18%

113 24% 31%

276 23% 19%

116 32% 18%

87 26% 34%

87 21% 26%

110 21% 16%

76 25% 24%

93 28% 27%

152 30% 17%

366 22% 23%

INCREASE/BY/MORE/THAN/10% INCREASE/BY/LESS/THAN/10% DECREASE/BY/LESS/THAN/10% DECREASE/BY/MORE/THAN/10%

18% 8% 6% 13%

14% 9% 9% 13%

14% 8% 10% 8%

21% 10% 6% 12%

17% 7% 6% 25%

14% 8% 9% 10%

21% 11% 6% 12%

17% 9% 7% 27%

17% 5% 6% 20%

12% 9% 6% 10%

19% 6% 13% 11%

18% 10% 13% 15%

20% 11% 7% 10%

14% 7% 9% 15%

STAY/THE/SAME

53%

52%

60%

49%

45%

58%

49%

35%

48%

61%

51%

43%

51%

53%

TOO/SOON/TO/SAY/DK REFUSED

1% 0%

2% 0%

1% 0%

2% 0%

1% 0%

1% 1%

4% 0%

5% 0%

1% 0%

0% 0%

2% 0%

QUESTIONS 7-‐15: Now, I would like to read you a list of factors that some companies are concerned about. For each one, please rate how concerned your firm is about that particular factor using a scale from 1 to 10, where one means that your firm is NOT AT ALL CONCERNED about it and where ten means your firm is VERY CONCERNED about it. You can choose any number between one and ten depending on how strongly you feel about it. YEARS%IN% REGION REVENUES EMPLOYEES PRIMARY%BUSINESS OPERATION REST% LESS% 10% OF% THAN% $1M%2% OR% PREC2 MET2 PRO2 1215% 16+% TWIN% AL CESS YRS YRS CITIES STATE $1M $5M $5M+ LESS 11250 51+ OEM ISION % Summary%of%Concerns:%%%10 BASE=TOTAL%SAMPLE 226 297 245 114 113 276 116 87 87 110 76 93 152 366 THE.COSTS.OF.HEALTH.CARE. 31% 27% 31% 30% 20% 32% 30% 21% 28% 38% 29% 24% 27% 30% COVERAGE GOVERNMENT.POLICIES.AND. 22% 24% 24% 25% 18% 22% 30% 13% 18% 22% 25% 25% 21% 24% REGULATIONS ATTRACTING.AND.RETAINING. 8% 12% 7% 11% 14% 9% 14% 15% 10% 7% 11% 7% 8% 11% QUALIFIED.WORKERS ECONOMIC.AND.GLOBAL. 12% 8% 11% 11% 3% 11% 16% 0% 9% 9% 10% 11% 9% 10% UNCERTAINTY FUTURE.LEADERSHIP.WITHIN. 5% 6% 6% 6% 3% 6% 5% 4% 4% 6% 7% 7% 3% 6% COMPETITION.FROM. 5% 5% 5% 5% 1% 6% 6% 2% 7% 3% 7% 8% 4% 5% FOREIGN.SOURCES COSTS.OF.EMPLOYEE. 6% 4% 4% 4% 3% 5% 6% 6% 3% 4% 3% 8% 6% 5% SALARIES.AND.BENEFITS,.NOT. INCLUDING.HEALTH. THE.SHIPPING.AND.LOGISTICS. 3% 3% 3% 2% 2% 4% 3% 2% 4% 1% 5% 2% 5% 2% OF.GETTING.YOUR.PRODUCTS. TO.MARKET MANAGING.SUPPLY.CHAIN. 3% 2% 2% 2% 2% 3% 1% 2% 2% 2% 1% 2% 3% 2% RELATIONSHIPS

297

QUESTION 16: What would you say are the one or two biggest challenges your firm is facing that might negatively impact future growth? (COMBINED CHOICES)

% % BASE=TOTAL%SAMPLE UNFAVORABLE5BUSINESS5 CLIMATE,5SUCH5AS5TAXES,5 REGULATIONS5AND5POLICY5 RISING5HEALTH5CARE5AND5 INSURANCE5COSTS WEAK5ECONOMY5AND5LOWER5 SALES5FOR5YOUR5PRODUCTS ATTRACTING5AND5RETAINING5 A5QUALIFIED5WORKFORCE RISING5COSTS5OF5ENERGY5 AND5MATERIALS5

REGION REST% TWIN% OF% CITIES STATE

REVENUES LESS% THAN% $1M%2% $1M $5M $5M+

EMPLOYEES

YEARS%IN% OPERATION

PRIMARY%BUSINESS

10%OR% LESS

11250

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

226

297

245

114

113

276

116

110

152

366

37%

38%

36%

43%

37%

41%

35%

32%

35%

46%

43%

34%

39%

30%

36%

32%

36%

37%

34%

36%

32%

29%

41%

40%

31%

32%

34%

35%

31%

33%

30%

37%

32%

35%

34%

41%

35%

27%

26%

30%

34%

24%

32%

20%

32%

44%

20%

36%

49%

31%

26%

23%

30%

31%

27%

FOREIGN5COMPETITION

16% 2%

14% 1%

21% 1%

12% 2%

4% 1%

19% 2%

14% 1%

4% 0%

23% 2%

11% 2%

9% 2%

17% 2%

16% 1%

15% 2%

OTHER DON'T5KNOW/NOT5SURE REFUSED

4% 1% 0

1% 1% 0%

3% 1% 0%

3% 3% 0%

1% 1% 0

3% 1% 0%

3% 0% 0

2% 2% 0%

3% 0% 0%

2% 2% 1%

3% 2% 0

0% 1% 0

2% 2% 1%

3% 1% 0

QUESTION 17: Thinking ahead…what would you say are the two or three most important drivers of your firm's future growth? (COMBINED CHOICES) REGION REST% TWIN% OF% CITIES STATE

% % BASE=TOTAL%SAMPLE 226 297 NEW.CUSTOMERS 81% 82% NEW.PRODUCTS 50% 49% DEVELOPING.COMPANY. MANAGERS.AND.LEADERS 28% 25% ENHANCING.SUPPLY.CHAIN. RELATIONSHIPS 19% 22% ACHIEVING.ISO.CERTIFICATION 5% 7% GOVERNMENT.POLICIES/REGS 1% TIONS 1% ATTRACTING QUALIFIED WORKFORCE IED.WORKFORCE 1% 1% OTHER DON'T.KNOW/NOT.SURE REFUSED

6% 5% 0%

6% 5% 1%

LESS% THAN% $1M

REVENUES

EMPLOYEES

YEARS%IN% OPERATION

PRIMARY%BUSINESS

$1M%2% $5M

$5M+

10%OR% LESS

11250

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

245 83% 53%

114 82% 46%

113 76% 45%

276 83% 49%

116 79% 46%

87 79% 50%

87 81% 55%

110 88% 51%

76 71% 48%

93 80% 51%

152 81% 48%

366 82% 50%

15%

36%

44%

18%

37%

48%

18%

23%

30%

28%

26%

21% 6% 1% 0%

19% 8% 1% 1%

19% 4% 2% 2%

22% 8% 1% 1%

22% 8% 1% 2%

18% 2% 2% 0%

27% 7% 0% 1%

19% 5% 2% 1%

16% 8% 3% 2%

25% 3% 0% 1%

22% 8% 1% 0%

21% 6% 1% 1%

7% 7% 1%

7% 5% 0%

5% 3% 1%

6% 5% 1%

5% 5% 1%

4% 2% 0%

8% 5% 1%

4% 5% 0%

6% 8% 1%

5% 7% 0%

5% 6% 1%

6% 5% 0%

QUESTION 18: On average, over the last two years, have your firm's wages, including benefits, increased, decreased, or stayed about the same?

REGION REST% TWIN% OF% CITIES STATE

REVENUES LESS% THAN% $1M%2% $1M $5M $5M+

EMPLOYEES 10%OR% LESS 11250

YEARS%IN% OPERATION

PRIMARY%BUSINESS

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

BASE=TOTAL%SAMPLE TOTAL/INCREASED TOTAL/DECREASED

226 56% 5%

297 61% 4%

245 41% 7%

114 77% 2%

113 81% 2%

276 45% 8%

116 85% 1%

87 72% 2%

87 59% 3%

110 51% 6%

76 68% 3%

93 62% 5%

152 49% 2%

366 63% 5%

INCREASED/CONSIDERABLY INCREASED/A/LITTLE DECREASED/A/LITTLE DECREASED/CONSIDERABLY

19% 37% 4% 2%

21% 39% 2% 2%

11% 30% 4% 3%

33% 44% 1% 1%

28% 53% 2% 0%

16% 29% 4% 3%

35% 50% 1% 0%

23% 50% 2% 0%

21% 38% 1% 2%

17% 34% 4% 2%

22% 46% 3% 0%

26% 36% 3% 2%

16% 33% 2% 0%

22% 41% 3% 2%

STAYED/THE/SAME

36%

35%

51%

22%

16%

47%

14%

22%

35%

43%

29%

34%

47%

31%

2% 0%

0% 0%

1% 0%

0% 0%

1% 0%

0% 0%

4% 0%

3% 0%

1% 0%

0% 0%

2% 0%

1% 0%

DON'T/KNOW REFUSED

298

QUESTION 19: Do you expect the average wages, including benefits to increase or decrease during the next two years, or will they stay about the same?

% % BASE=TOTAL%SAMPLE INCREASE DECREASE STAY6ABOUT6THE6SAME DON'T6KNOW REFUSED

REGION REST% OF% TWIN% CITIES STATE

REVENUES LESS% THAN% $1M%2% $1M $5M $5M+

EMPLOYEES 10%OR% LESS 11250

YEARS%IN% OPERATION

PRIMARY%BUSINESS

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

226 60% 5% 34%

297 62% 3% 35%

245 46% 5% 47%

114 76% 2% 22%

113 81% 0% 19%

276 48% 5% 46%

116 79% 2% 19%

87 83% 0% 17%

87 68% 3% 27%

110 51% 3% 44%

76 68% 2% 30%

93 58% 6% 35%

152 60% 4% 34%

366 61% 4% 35%

1% 0%

0% 0%

1% 0%

0% 0%

1% 0%

0% 0%

2% 0%

0% 0%

2% 0%

0% 0%

QUESTION 20: Are you currently investing in employee development or leadership training in order to attract and retain qualified employees and managers?

% % BASE=TOTAL%SAMPLE YES NO NOT2SURE REFUSED

REGION REST% OF% TWIN% CITIES STATE

REVENUES LESS% THAN% $1M%2% $1M $5M $5M+

EMPLOYEES 10%OR% LESS 11250

YEARS%IN% OPERATION

PRIMARY%BUSINESS

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

226 31% 67%

297 37% 63%

245 18% 81%

114 37% 61%

113 65% 35%

276 20% 80%

116 40% 59%

87 80% 20%

87 36% 62%

110 26% 74%

76 43% 57%

93 43% 57%

152 31% 67%

366 36% 63%

1% 0%

0% 0%

1% 0%

2% 0%

0% 0%

1% 0%

0% 0%

2% 0%

1% 0%

0% 0%

2% 0%

0% 0%

QUESTION 21: Generally speaking, would you say that as a percentage of payroll your company will invest MORE in employee development or LESS next year compared to 2015, or will it stay about the same? YEARS%IN% REGION REVENUES EMPLOYEES PRIMARY%BUSINESS OPERATION REST% LESS% TWIN% 10%OR% PREC2 MET2 PRO2 1215% 16+% OF% THAN% $1M%2% $5M+ 11250 51+ OEM CITIES STATE $1M $5M LESS ISION AL CESS YRS YRS % % BASE=TOTAL%SAMPLE 226 297 245 114 113 276 116 87 87 110 76 93 152 366 WILL.INVEST.MORE 24% 20% 13% 32% 33% 15% 31% 32% 24% 19% 21% 26% 30% 19% WILL.INVEST.LESS 5% 6% 6% 5% 3% 7% 6% 2% 6% 5% 4% 7% 5% 6% 71% 73% 80% 63% 64% 78% 62% 64% 67% 76% 73% 68% 65% 74% STAY.THE.SAME DON'T.KNOW 0% 1% 0% 0% 1% 0% 1% 2% 2% 0% 1% 0% 1% 1% REFUSED 0% 0% 0% 0% 0% 0% 0% 0% 0% 1% 0% 0% 0% 0% QUESTION 22: Does your company have a formal structured leadership development program for supervisors and managers? YEARS%IN% REGION REVENUES EMPLOYEES PRIMARY%BUSINESS OPERATION REST% LESS% TWIN% 10%OR% PREC2 MET2 PRO2 1215% 16+% OF% THAN% $1M%2% CITIES STATE $5M $5M+ LESS 11250 51+ OEM ISION AL CESS YRS YRS $1M % % BASE=TOTAL%SAMPLE 226 297 245 114 113 276 116 87 87 110 76 93 152 366 YES 21% 23% 11% 22% 43% 10% 27% 54% 20% 16% 16% 35% 17% 24% NO 78% 76% 88% 77% 57% 89% 71% 43% 77% 84% 84% 64% 82% 75% DON'T4KNOW/UNSURE 1% 1% 0% 1% 1% 1% 1% 2% 3% 0% 0% 1% 1% 1% REFUSED 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

299

QUESTION 23: Looking back on the last 12 months, did your company's workforce grow, shrink or stay about the same?

REGION REVENUES REST% LESS% TWIN% OF% THAN% $1M%2% CITIES STAT $1M $5M $5M+

EMPLOYEES 10%OR% LESS 11250

YEARS%IN% OPERATION

PRIMARY%BUSINESS

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

% BASE=TOTAL%SAMPLE TOTAL/GREW TOTAL/SHRUNK

226 29% 8%

297 23% 16%

245 13% 9%

114 35% 13%

113 42% 21%

276 15% 11%

116 39% 10%

87 43% 23%

87 25% 7%

110 28% 10%

76 31% 12%

93 27% 15%

152 27% 8%

366 26% 14%

GREW/A/LOT GREW/A/LITTLE SHRUNK/A/LITTLE SHRUNK/A/LOT

8% 21% 5% 3%

7% 16% 8% 8%

4% 9% 6% 3%

8% 28% 7% 6%

12% 30% 7% 14%

4% 11% 7% 4%

14% 25% 6% 4%

12% 31% 6% 17%

7% 18% 4% 3%

7% 21% 5% 6%

5% 26% 6% 7%

14% 14% 5% 10%

10% 17% 5% 3%

6% 19% 7% 8%

STAYED/ABOUT/THE/SAME

63%

60%

77%

51%

38%

73%

51%

34%

67%

60%

57%

58%

65%

60%

0% 0%

1% 0%

0% 0%

1% 0%

0% 0%

1% 0%

0% 0%

DON'T/KNOW/UNSURE REFUSED

QUESTION 24: In the next 12 months, does your company expect to grow or shrink the size of its workforce, or will it stay about the same? YEARS%IN% REGION REVENUES EMPLOYEES PRIMARY%BUSINESS OPERATION REST% LESS% OF% THAN% $1M%2% TWIN% 10%OR% PREC2 MET2 PRO2 1215% 16+% 51+ OEM ISION CITIES STATE $1M $5M $5M+ LESS 11250 AL CESS YRS YRS % % BASE=TOTAL%SAMPLE 226 297 245 114 113 276 116 87 87 110 76 93 152 366 TOTAL/GROW 31% 26% 20% 31% 40% 22% 36% 43% 33% 24% 28% 30% 41% 23% TOTAL/SHRINK 4% 5% 3% 7% 5% 3% 7% 7% 2% 6% 5% 5% 1% 6% 8% 5% 5% 6% 6% 6% 5% 8% 7% 5% 6% 6% 10% 4% GROW/A/LOT 24% 21% 15% 25% 33% 16% 30% 35% 26% 19% 22% 25% 31% 19% GROW/A/LITTLE SHRINK/A/LITTLE 2% 4% 2% 4% 3% 1% 3% 7% 1% 5% 2% 1% 1% 4% SHRINK/A/LOT 2% 1% 1% 2% 2% 2% 4% 0% 1% 1% 3% 4% 1% 2% STAY/ABOUT/THE/SAME 64% 69% 77% 62% 56% 75% 57% 50% 64% 69% 67% 65% 57% 71% DON'T/KNOW/UNSURE 1% 0% 0% 0% 0% 1% 0% 0% 1% 1% 0% 0% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% REFUSED QUESTION 25: Which one of the following reasons comes closest to describing why you believe your firm’s workforce size will stay about the same in the next 12 months? YEARS%IN% REGION REVENUES EMPLOYEES PRIMARY%BUSINESS OPERATION REST% LESS% TWIN% OF% THAN% $1M%2% 10%OR% PREC2 MET2 PRO2 1215% 16+% CITIES STATE $1M $5M $5M+ LESS 11250 51+ OEM ISION AL CESS YRS YRS % % BASE=STAY%SAME%IN%Q24 YOU$ARE$NOT$EXPECTING$ ADDITIONAL$BUSINESS$IN$THE$ COMING$YEAR YOUR$FIRM$HAS$BECOME$ MORE$EFFICIENT$AND$ AUTOMATED,$SO$ADDITIONAL$ WORKERS$AREN'T$ NECESSARY YOU$ARE$CONCERNED$ABOUT$ ECONOMIC$CONDITIONS$AND$ HOW$THEY$MIGHT$IMPACT$ YOUR$FIRM PROFIT$MARGINS$ARE$DOWN$ AND$YOU$ARE$TRYING$TO$DO$ MORE$WITHOUT$HIRING$ ADDITIONAL$WORKERS YOUR$FIRM$IS$HAVING$ TROUBLE$RECRUITING$AND$ ATTRACTING$WORKERS OTHER DON'T4KNOW REFUSED

145

204

189

206

260

27%

31%

20%

25%

30%

20%

26%

25%

23%

28%

19%

26%

28%

26%

22%

28%

37%

24%

32%

37%

27%

29%

23%

37%

28%

26%

20%

15%

31%

14%

16%

22%

17%

19%

18%

16%

17%

14%

16%

12%

11%

17%

12%

20%

10%

19%

12%

14%

16%

15%

5% 1% 1%

10% 3% 0%

9% 3% 0%

5% 1% 0%

8% 1% 0%

6% 2% 1%

6% 2% 0%

7% 0% 0%

15% 2% 0%

6% 1% 0%

10% 2% 0%

4% 4% 0%

10% 1% 1%

7% 3% 0%

REGION REST% TWIN% OF% CITIES STATE

% % BASE=TOTAL%SAMPLE 226 YOU$ARE$NOT$EXPECTING$ ADDITIONAL$BUSINESS$IN$THE$ 17% COMING$YEAR YOUR$FIRM$HAS$BECOME$ MORE$EFFICIENT$AND$ AUTOMATED,$SO$ADDITIONAL$

LESS% THAN% $1M

REVENUES

EMPLOYEES

30010%OR%

YEARS%IN% OPERATION

PRIMARY%BUSINESS

$1M%2% $5M

$5M+

LESS

11250

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

297

245

114

113

276

116

110

152

366

19%

24%

13%

14%

22%

11%

13%

16%

19%

12%

15%

20%

HOW$THEY$MIGHT$IMPACT$ YOUR$FIRM PROFIT$MARGINS$ARE$DOWN$ AND$YOU$ARE$TRYING$TO$DO$ MORE$WITHOUT$HIRING$ ADDITIONAL$WORKERS YOUR$FIRM$IS$HAVING$ TROUBLE$RECRUITING$AND$ ATTRACTING$WORKERS OTHER DON'T4KNOW REFUSED

% % BASE=TOTAL%SAMPLE YOU$ARE$NOT$EXPECTING$ ADDITIONAL$BUSINESS$IN$THE$ COMING$YEAR YOUR$FIRM$HAS$BECOME$ MORE$EFFICIENT$AND$ AUTOMATED,$SO$ADDITIONAL$ WORKERS$AREN'T$ NECESSARY YOU$ARE$CONCERNED$ABOUT$ ECONOMIC$CONDITIONS$AND$ HOW$THEY$MIGHT$IMPACT$ YOUR$FIRM PROFIT$MARGINS$ARE$DOWN$ AND$YOU$ARE$TRYING$TO$DO$ MORE$WITHOUT$HIRING$ ADDITIONAL$WORKERS YOUR$FIRM$IS$HAVING$ TROUBLE$RECRUITING$AND$ ATTRACTING$WORKERS OTHER DON'T4KNOW REFUSED

20%

15%

31%

14%

16%

22%

17%

19%

18%

16%

17%

14%

16%

12%

11%

17%

12%

20%

10%

19%

12%

14%

16%

15%

5% 1% 1%

10% 3% 0%

9% 3% 0%

5% 1% 0%

8% 1% 0%

6% 2% 1%

6% 2% 0%

7% 0% 0%

15% 2% 0%

6% 1% 0%

10% 2% 0%

4% 4% 0%

10% 1% 1%

7% 3% 0%

REGION REST% TWIN% OF% CITIES STATE

LESS% THAN% $1M

REVENUES

EMPLOYEES

YEARS%IN% OPERATION

PRIMARY%BUSINESS

$1M%2% $5M

$5M+

10%OR% LESS

11250

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

226

297

245

114

113

276

116

110

152

366

17%

19%

24%

13%

14%

22%

11%

13%

16%

19%

12%

15%

20%

17%

18%

17%

20%

18%

19%

17%

20%

16%

24%

16%

19%

13%

10%

12%

19%

12%

13%

11%

13%

12%

11%

12%

11%

10%

13%

10%

13%

11%

3% 1% 1%

7% 2% 0%

3% 1% 0%

4% 1% 0%

5% 2% 1%

4% 1% 0%

4% 0% 0%

10% 1% 0%

4% 1% 0%

7% 1% 0%

3% 3% 0%

6% 1% 1%

5% 2% 0%

QUESTION 26A: I am going to read you a few different roles within manufacturing and I would like to know how well you feel your firm is prepared to handle the departure of someone in that role. Would you say you are very well, somewhat well, or not well prepared to handle that person’s departure? THE CEO OR OWNER

% % BASE=TOTAL%SAMPLE TOTAL%WELL VERY%WELL SOMEWHAT%WELL NOT%WELL DON'T1KNOW REFUSED

REGION REST% TWIN% OF% CITIES STATE

REVENUES LESS% THAN% $1M%2% $5M+ $5M $1M

EMPLOYEES

YEARS%IN% OPERATION

PRIMARY%BUSINESS

10%OR% LESS

11250

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

226 50%

297 58%

245 52%

114 46%

113 67%

276 50%

116 54%

87 75%

87 46%

110 54%

76 59%

93 53%

152 45%

366 58%

31% 19% 44%

28% 30% 37%

30% 22% 41%

23% 23% 48%

26% 41% 32%

29% 21% 43%

26% 28% 43%

34% 40% 25%

29% 18% 46%

26% 28% 40%

28% 30% 37%

34% 19% 41%

25% 20% 50%

31% 27% 37%

4% 1%

6% 1%

1% 4%

1% 0%

6% 1%

3% 0%

0% 0%

5% 2%

4% 2%

5% 0%

5% 1%

3% 1%

QUESTION 26B: I am going to read you a few different roles within manufacturing and I would like to know how well you feel your firm is prepared to handle the departure of someone in that role. Would you say you are very well, somewhat well, or not well prepared to handle that person’s departure? A MANAGER OR SUPERVISOR

% % BASE=TOTAL%SAMPLE TOTAL%WELL VERY%WELL SOMEWHAT%WELL NOT%WELL DON'T1KNOW REFUSED

REGION REST% OF% TWIN% CITIES STATE

LESS% THAN% $1M

REVENUES

EMPLOYEES

YEARS%IN% OPERATION

PRIMARY%BUSINESS

$1M%2% $5M

$5M+

10%OR% LESS

11250

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

226 71%

297 75%

245 65%

114 77%

113 90%

276 64%

116 81%

87 93%

87 72%

110 65%

76 84%

93 76%

152 70%

366 75%

31% 40% 21%

32% 43% 19%

32% 33% 26%

31% 46% 20%

30% 60% 9%

33% 31% 25%

26% 55% 18%

34% 58% 6%

29% 42% 20%

29% 37% 25%

34% 50% 12%

41% 35% 16%

33% 37% 23%

31% 43% 19%

7% 1%

5% 1%

8% 2%

2% 1%

1% 0%

9% 2%

1% 1%

2% 0%

5% 3%

8% 2%

3% 0%

8% 0%

6% 1%

QUESTION 26C: I am going to read you a few different roles within manufacturing and I would like to know how well you feel your firm is prepared to handle the departure of someone in that role. Would you say you are very well, somewhat well, or not well prepared to handle that person’s departure? A SKILLED WORKER

% % BASE=TOTAL%SAMPLE TOTAL%WELL VERY%WELL SOMEWHAT%WELL NOT%WELL DON'T1KNOW REFUSED

REGION REST% TWIN% OF% CITIES STATE

LESS% THAN% $1M

REVENUES

EMPLOYEES

YEARS%IN% OPERATION

PRIMARY%BUSINESS

$1M%2% $5M

$5M+

10%OR% LESS

11250

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

226 75%

297 76%

245 68%

114 82%

113 82%

276 70%

116 82%

87 85%

87 77%

110 69%

76 77%

93 81%

152 71%

366 77%

33% 41% 20%

31% 46% 20%

30% 38% 25%

35% 48% 15%

31% 51% 18%

30% 40% 24%

35% 47% 17%

32% 53% 15%

28% 49% 18%

25% 44% 22%

37% 40% 23%

40% 41% 14%

34% 37% 24%

31% 46% 19%

4% 1%

3% 1%

6% 1%

1% 1%

0% 0%

5% 1%

0% 1%

0% 0%

3% 1%

7% 2%

0% 0%

5% 0%

5% 1%

3% 1%

301

% % BASE=TOTAL%SAMPLE TOTAL%WELL VERY%WELL SOMEWHAT%WELL NOT%WELL DON'T1KNOW REFUSED

TWIN% CITIES

OF% STATE

THAN% $1M

$1M%2% $5M

$5M+

10%OR% LESS

11250

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

226 71%

297 75%

245 65%

114 77%

113 90%

276 64%

116 81%

87 93%

87 72%

110 65%

76 84%

93 76%

152 70%

366 75%

31% 40% 21%

32% 43% 19%

32% 33% 26%

31% 46% 20%

30% 60% 9%

33% 31% 25%

26% 55% 18%

34% 58% 6%

29% 42% 20%

29% 37% 25%

34% 50% 12%

41% 35% 16%

33% 37% 23%

31% 43% 19%

7% 1%

5% 1%

8% 2%

2% 1%

1% 0%

9% 2%

1% 1%

2% 0%

5% 3%

8% 2%

3% 0%

8% 0%

6% 1%

% % BASE=TOTAL%SAMPLE TOTAL%WELL VERY%WELL SOMEWHAT%WELL NOT%WELL DON'T1KNOW REFUSED

REGION REST% TWIN% OF% CITIES STATE

LESS% THAN% $1M

REVENUES

EMPLOYEES

YEARS%IN% OPERATION

PRIMARY%BUSINESS

$1M%2% $5M

$5M+

10%OR% LESS

11250

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

226 75%

297 76%

245 68%

114 82%

113 82%

276 70%

116 82%

87 85%

87 77%

110 69%

76 77%

93 81%

152 71%

366 77%

33% 41% 20%

31% 46% 20%

30% 38% 25%

35% 48% 15%

31% 51% 18%

30% 40% 24%

35% 47% 17%

32% 53% 15%

28% 49% 18%

25% 44% 22%

37% 40% 23%

40% 41% 14%

34% 37% 24%

31% 46% 19%

4% 1%

3% 1%

6% 1%

1% 1%

0% 0%

5% 1%

0% 1%

0% 0%

3% 1%

7% 2%

0% 0%

5% 0%

5% 1%

3% 1%

QUESTION 27: How much of an impact do you anticipate retirements having on your company in the next couple of years?

% % BASE=TOTAL%SAMPLE TOTAL/IMPACT TOTAL/NO/IMPACT

REGION REST% OF% TWIN% CITIES STATE

LESS% THAN% $1M

REVENUES

EMPLOYEES

YEARS%IN% OPERATION

PRIMARY%BUSINESS

$1M%2% $5M

$5M+

10%OR% LESS

11250

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

226 29% 71%

297 29% 70%

245 28% 72%

114 27% 73%

113 32% 68%

276 26% 74%

116 29% 71%

87 41% 59%

87 37% 63%

110 27% 73%

76 30% 70%

93 22% 77%

152 17% 83%

366 35% 65%

SIGNIFICANT/IMPACT MODEST/IMPACT ONLY/A/MINOR/IMPACT NO/IMPACT/AT/ALL

16% 12% 21% 50%

14% 16% 27% 44%

18% 10% 13% 59%

11% 16% 25% 48%

9% 23% 43% 25%

17% 9% 16% 58%

9% 19% 31% 41%

15% 26% 43% 15%

18% 19% 22% 41%

17% 10% 18% 55%

11% 19% 29% 41%

9% 13% 27% 51%

7% 10% 18% 65%

18% 16% 26% 39%

DON'T/KNOW REFUSED

0% 0%

0% 1%

0% 0%

QUESTION 28: How difficult is it to attract qualified candidates for your firm's vacancies? REGION REVENUES EMPLOYEES PRIMARY%BUSINESS REST% LESS% OF% THAN% $1M%2% TWIN% 10%OR% PREC2 MET2 $1M $5M+ 11250 51+ OEM CITIES STATE $5M LESS ISION AL % % BASE=TOTAL%SAMPLE 226 297 245 114 113 276 116 87 87 110 76 TOTAL/DIFFICULT 63% 73% 62% 76% 77% 63% 76% 85% 67% 64% 71% 30% 25% 32% 23% 23% 30% 24% 15% 29% 27% 29% TOTAL/NOT/DIFFICULT VERY/DIFFICULT 26% 28% 27% 27% 32% 26% 24% 36% 29% 29% 33% SOMEWHAT/DIFFICULT 37% 46% 35% 48% 46% 37% 52% 49% 38% 35% 39% 19% 14% 16% 17% 16% 17% 15% 9% 19% 13% 17% NOT/TOO/DIFFICULT 11% 11% 16% 6% 7% 14% 9% 6% 9% 13% 11% NOT/DIFFICULT/AT/ALL DON'T/KNOW 6% 2% 5% 2% 0% 6% 0% 0% 4% 7% 0% REFUSED 1% 0% 1% 0% 0% 1% 0% 0% 0% 2% 0%

302

YEARS%IN% OPERATION PRO2 CESS

1215% YRS

16+% YRS

93 63% 34%

152 65% 32%

366 71% 25%

19% 44% 21% 13%

23% 42% 20% 13%

29% 41% 14% 10%

3% 0%

2% 1%

4% 0%

QUESTION 29: For what reasons have job candidates not taken a job or followed through with an interview?

% % BASE=TOTAL%SAMPLE SKILLS/REQUIRED/ COMPENSATION/IS/NOT/HIGH/ ENOUGH LIMITED/LACK/OF/UPWARD/ JOB/MOBILITY LONG/COMMUTING/ TIME/DISTANCE WORK/SCHEDULES/NOT/ FLEXIBLE/ENOUGH OTHER DON'T/KNOW REFUSED

REGION REST% TWIN% OF% CITIES STATE

REVENUES LESS% THAN% $1M%2% $1M $5M $5M+

EMPLOYEES

YEARS%IN% OPERATION

PRIMARY%BUSINESS

10%OR% LESS

11250

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

226 45%

297 39%

245 38%

114 50%

113 44%

276 41%

116 43%

87 45%

87 47%

110 46%

76 42%

93 41%

152 40%

366 42%

26%

27%

24%

26%

37%

21%

30%

44%

36%

21%

15%

28%

26%

27%

17%

11%

13%

11%

17%

14%

15%

14%

12%

21%

14%

11%

14%

16%

11%

12%

19%

10%

16%

17%

10%

18%

17%

14%

12%

13%

10%

15%

13%

14%

10%

14%

11%

10%

13% 16% 1%

13% 13% 2%

16% 15% 2%

12% 14% 1%

12% 5% 1%

16% 16% 2%

14% 12% 2%

6% 6% 0%

18% 9% 0%

11% 19% 3%

13% 10% 1%

7% 21% 3%

14% 17% 2%

13% 13% 2%

QUESTION 30: What would you say is the biggest challenge your firm faces in attracting qualified candidates?

% % BASE=TOTAL%DIFFICULT%IN%Q28 APPLICANTS2DO2NOT2HAVE2THE NEEDED2SKILLS/EDUCATION2 LACK2OF2APPLICANTS/INTEREST FIRM2TOO2SMALL2TO2 COMPETITIVELY2RECRUIT INABILITY2TO2OFFER2 COMPETITIVE2WAGES FIRM2LOCATION22 SOMETHING2ELSE

DON'T2KNOW REFUSED

% % BASE=TOTAL%SAMPLE APPLICANTS3DO3NOT3HAVE3THE NEEDED3SKILLS/EDUCATION LACK3OF3APPLICANTS/INTEREST FIRM3TOO3SMALL3TO3 COMPETITIVELY3RECRUIT INABILITY3TO3OFFER3 COMPETITIVE3WAGES FIRM3LOCATION SOMETHING3ELSE

DON'T3KNOW REFUSED

REGION REST% TWIN% OF% CITIES STATE

REVENUES LESS% THAN% $1M%2% $1M $5M $5M+

EMPLOYEES 10%OR% LESS

11250

YEARS%IN% OPERATION

PRIMARY%BUSINESS

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

143

218

153

174

259

53% 34%

42% 43%

45% 31%

45% 42%

51% 52%

45% 33%

48% 41%

48% 57%

47% 46%

62% 45%

54% 43%

41% 34%

45% 28%

47% 43%

39%

25%

44%

33%

11%

42%

25%

29%

43%

28%

24%

36%

28%

22% 7% 4%

18% 23% 6%

22% 16% 4%

15% 13% 9%

19% 23% 3%

21% 14% 5%

20% 17% 10%

18% 26% 2%

20% 14% 0%

22% 11% 3%

11% 18% 6%

28% 23% 3%

21% 14% 8%

19% 18% 4%

3% 1%

1% 0%

1% 1%

2% 0%

0% 0%

3% 1%

2% 0%

0% 0%

1% 0%

0% 1%

3% 0%

3% 1%

1% 0%

REGION REST% TWIN% OF% CITIES STATE

REVENUES LESS% THAN% $1M%2% $1M $5M $5M+

EMPLOYEES 10%OR% LESS 11250

YEARS%IN% OPERATION

PRIMARY%BUSINESS

51+

OEM

PREC2 ISION

MET2 AL

PRO2 CESS

1215% YRS

16+% YRS

226

297

245

114

113

276

116

110

152

366

33% 22%

31% 31%

28% 19%

34% 32%

39% 41%

29% 21%

37% 32%

41% 49%

32% 31%

40% 29%

39% 31%

26% 21%

29% 18%

33% 31%

24%

18%

27%

25%

26%

19%

20%

28%

20%

15%

24%

20%

14% 5% 3%

13% 17% 4%

14% 10% 2%

11% 10% 7%

15% 18% 2%

14% 9% 3%

15% 13% 8%

15% 22% 2%

14% 10% 0%

14% 7% 2%

8% 13% 5%

18% 15% 2%

13% 9% 5%

14% 13% 3%

2% 0%

1% 0%

0% 0%

2% 1%

1% 0%

0% 0%

1% 0%

0% 1%

2% 0%

2% 1%

1% 0%

303

$15.95

the unforeseen recession of 2008-09.

—Rob Autry, pollster, State of Manufacturing®

Inside, you’ll find:

• Topline results from a survey of 400 Minnesota manufacturing executives • Detailed analysis from pollster Rob Autry, president, Meeting Street Research • Related analyses

A C o m p r e h e n s i v e S u r v e y o f M i n n e s o t a ’s M a n u f a c t u r e r s

still mindful of the scars and lessons learned in

The State of Manufacturing ® 2016

One might speculate that manufacturers are

A Comprehensive Survey of Minnesota’s Manufacturers

2016

• Full transcripts from 19 manufacturing focus groups conducted across the state • Selected cross tabulations

READY FOR

ANYTHING

Manufacturers used the lessons of 2009 to retrench their companies against outside pressures

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