The State of Manufacturing® 2015 by Enterprise Minnesota

$15.95

loom in the background of the optimism, even

if the prospects of profitability might temporarily diminish their urgency. Most prominent is the growing skills gap."

Bob Kill President & CEO Enterprise MInnesota

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

2015

Inside, you’ll find:

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

systemic challenges for manufacturers that still

The State of Manufacturing 2015

"It’s important to emphasize some of the

A Comprehensive Survey of Minnesota’s Manufacturers Polling & Analysis by Rob Autry, Meeting Street Research

• Related analyses • Full transcripts from 12 manufacturing focus groups conducted across the state • Selected cross tabulations www.stateofmanufacturing.com

2015 A Comprehensive Survey of Minnesotaâ&#x20AC;&#x2122;s Manufacturers

The State of ManufacturingÂŽ 2015

A comprehensive survey of Minnesotaâ&#x20AC;&#x2122;s manufacturers Rob Autry, Pollster Tom Mason, Strategic Consultant Lynn Shelton, 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 Pollster’s Analysis ....................................................... 9 Poll Summary ............................................................ 18 Issue Analysis

Getting e-Commerce Strategy Right .........................................37 Made in Minnesota ....................................................................44 Distribution Dilemmas ..............................................................50 Total Worker Health ...................................................................56 Engage Your Employees Every Day... With a Little Glue and Caffeine ............................................63 Build Business Results that Matter Through Marketing ...........71

Focus Groups

Litchfield (Custom Products of Litchfield, Inc.) ....................83 Albert Lea (Riverland Community College).........................95 St. Paul (Saint Paul College) ............................................107 Minneapolis (MPMA) .....................................................118 Plymouth (MRA) ...........................................................128 Elk River (Elk River City Hall) ........................................140 Mankato (South Central College) .....................................148 Redwood Falls (Duffy’s Restaurant) .................................158 Minneapolis (Surly Brewing Company) ............................167 St. Cloud (Gray Plant Mooty) ..........................................177 Willmar (Ridgewater College) .........................................189 Alexandria (Alexandria Technical & Community College) ..199

Selected Cross Tabulations ............................................211 3

INTRODUCTION

Steady As She Goes This year’s State of Manufacturing® survey, while optimistic, is far from a good-news-is-no-news situation. By Bob Kill, president & CEO, Enterprise Minnesota

As I read through the results of this year’s State of Manufacturing

survey, I’m reminded of the CEO of a renowned local Fortune 500 company who used to lament that the stellar year-to-year performance of his firm’s stock price received scant media attention because, he was told, there is nothing newsworthy in predictably good news. The data and analysis that follow will show you that Minnesota’s manufacturing executives are overwhelmingly bullish about their prospects for 2015. (Not all of them. The folks who rely on agriculture, in particular, are far less sanguine about their prospects.) They think the economy is stable, that their industries are relatively strong, and they intend to add jobs to the economy and generally raise the wages of their employees. But this is far from a good-news-is-no-news situation. I’ll grant that the survey doesn’t uncover any hair-on-fire urgencies that urgently demand 4

the attention of the markets, vendors, communities or policy-makers. The State of Manufacturing® interviews reveal that manufacturing in Minnesota today is by and large a steady market sector in which savvy executives are planning and pondering opportunities they can take advantage of while they grow revenues. This is important. We’re all tempted to celebrate the poll’s finding that 89 percent of manufacturing executives are confident about the future of their companies. And it is very good news, but their confidence doesn’t imply the underlying theme of this year’s survey. Rob Autry, our pollster, points out that manufacturers are always confident about their futures. When we fielded our first survey just after the economic crash in 2008, 79 percent of the executives we interviewed were also confident of their futures. Think of it: their markets were in chaos, drying up order sheets, pummeling vendors, and roiling international relationships. And their bankers, who were in the midst of their own turmoil, were re-examining even their Bob Kill safest lines of credit. Yet 79 percent of manufacturers in that survey were confident about the futures of their companies. When we got to the focus groups, we found out why. Instead of emotional hand-wringing and finger-pointing, the conversations generally revolved around finding opportunities in the downturn. Do we retrain? Do we retool? Do we look for new markets or new products? Do we use the time to reinforce our personal sales relationships? Don’t get me wrong. The exchanges also included a good measure of genuine anguish as executives shared the personal pain involved in cutbacks and layoffs. Small and medium size manufacturing companies are mostly highly personal places in which everybody knows everybody else. Employees are people, not statistics. Yet it was evident that these executives had been through previous downturns and would be through them again. They were – and are – long-haul thinkers and planners. 5

So this year, even though the economy appears steady, markets are mostly strong, and manufacturers are anticipating solid revenue growth, not one focus group even hinted at irrational exuberance. Manufacturers are, always, looking ahead. That’s why it’s important to emphasize some of the systemic challenges for manufacturers that still loom in the background of the optimism, even if the elixir of profitability might diminish their urgency. Most prominent is the growing skills gap. The survey—and the focus groups, in particular—underscored that manufacturers recognize the impending double whammy of increasing retirements and the already chronic shortage of well-qualified employees to replace the retirees. One manufacturer told a focus group that he is looking for a 10 percent increase in revenues in 2015, but that he might achieve a 100 percent increase if he could find and hire qualified workers. Another told of paying employees a $5,000 bonus for recruiting qualified candidates who get hired and who stay for six months. The time to address this situation with urgency is now, not to wait until the survey identifies it as crisis. Regionalization. We’ve done something new and different with this year’s survey. We always like to emphasize that it is wrong to ever generalize too much from survey results in an industry that is a diverse and dynamic as manufacturing. That’s why this year we decided to bump up the number of State of Manufacturing® interviews so that we could compare different regions of the state. This year’s survey divided the state into areas that follow the borders of Minnesota’s Initiative Foundations. They are: Northwest Minnesota Foundation (Bemidji), Northland Foundation (Duluth), Southwest Initiative Foundation (Hutchinson), The Initiative Foundation (IF) (Little Falls), Southern Minnesota Initiative Foundation (Owatonna), and West Central Initiative (Fergus Falls). We over-sampled so that we could get at least 50 respondents in each region. This ended up being an interesting experiment. Thanks. I say this every year because it is always true. The State of Manufacturing® would not succeed without the selfless collaboration of so many organizations and individuals. As always, we’re all grateful to our sponsors, whose financial backing helps us defray the considerable costs of the event and whose insights and ideas always contribute to a meaningful questionnaire and whose individual networks always plug us into a new set of thought leaders. Pollster Rob Autry has conducted the survey in each of the past seven years. Rob, founder of Meeting Street Research, is one of America’s premier pollsters. We’ve drawn great credibility from his creativity, patience and keen analytic skills. And Tom Mason, our long-time 6

consultant, has also been with us from the beginning. He has now conducted more than 100 State of Manufacturing® focus groups. Finally, a special thanks goes to Lynn Shelton, the director of marketing and communications at Enterprise Minnesota, who has managed the State of Manufacturing® since it was nothing more than a concept. It is impossible to overestimate the amount of effort that she and her staff—Lynet DaPra, Constance Fantin and Chris Morse—devote to quietly completing the detail-laden schedule of tasks that comprise the various elements of this project. Sponsors have to be recruited, the research has to be organized, and schedules have to be juggled to arrange logistics for 15-20 focus groups across the state each year and then fill them with participants. Then there are “rollout” events to arrange and populate, including the massive kickoff at the Minneapolis Convention Center. And that doesn’t even contemplate the matter of systematically marketing the results to media, elected officials, educators, regulators, fellow manufacturers and anybody else who should know about them. Or how about overseeing the feat of publishing this 300-page book in incredibly short order? For this edition, almost 15 hours worth of focus group recordings had to be transcribed into 90,000 words, which were then edited, proofed, designed, proofed again and delivered to the printer—in less than three weeks. Quite a feat! And finally, we want to thank Minnesota’s manufacturers. And not just those who agreed to be interviewed or who took time out of their days to participate in our focus groups, or who will attend the briefings we will hold to release the results. We like to use our annual State of Manufacturing® project to celebrate the people and companies “who make stuff” as the job-creating engines of our economy.

Thank you to our 2015 sponsors! STATEWIDE SPONSORS • Baker Tilly • BMO Harris Bank • Granite Equity Partners • Gray Plant Mooty • Marsh & McLennan Agency • Minnesota Department of Employment and Economic Development (DEED) • MRA • Risdall Marketing Group GOLD SPONSOR • Blandin Foundation SILVER SPONSOR • C.H. Robinson FOCUS GROUP SPONSORS • Albert Lea-Freeborn County Chamber of Commerce • Alexandria Technical & Community College • Alexandria Area Economic Development Association • City of Elk River Economic Development Authority • Custom Products of Litchfield, Inc. • Interstate Packaging Corp

• Litchfield Chamber of Commerce • Lou-Rich, Inc. • Meeker County Economic Development • Minnesota Precision Manufacturers Association (MPMA) • Redwood Area Development Corporation • Ridgewater College • Riverland Community College • Seal Tech Industries • South Central College • Southwest Initiative Foundation • Saint Paul College • St. Paul Port Authority MANUFACTURING SPONSORS • Absolute Quality Manufacturing • Central Package & Display • Clow Stamping Company • Delmar Company • Dunwoody College of Technology • GVL Poly • MacTech, Inc. • Page 1 Printers • Pequot Tool & Manufacturing, Inc. • USDA Rural Development • W.P & R.S Mars Co.

POLLSTER’S ANALYSIS

Calm and Deep Minnesota’s manufacturers say they’ll grow, create jobs, and increase salaries. But the skills gap, the costs of health insurance, and zealous government oversight remain possible impediments By Rob Autry

Minnesota’s manufacturers overwhelmingly expect to parlay previous

success and a sturdy economy into solid business growth in 2015, during which they’ll expand hiring and increase wages, much as they say they’ve done over the past two years. At the same time, they remain apprehensive about the looming skills gap being fueled by retirements among Baby Boomers. These are the results of the seventh annual 2015 State of Manufacturing® survey, which my company, Meeting Street Research, conducted on

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 seven State of Manufacturing surveys. 9

behalf of Enterprise Minnesota. We interviewed 535 Minnesota-based manufacturing executives between February 23 and March 18 of this year. The enthusiasm of this year’s respondents continues the trend of previous years. Minnesota’s manufacturers have consistently expressed optimism about the long-term prospects of their companies, even during the dark economic days of the 2008-2009 recession. Over the past four years, between 82 percent and 84 percent of the executives said they were confident about the future of their companies. This year’s executives revealed their highest level of confidence yet, reaching a whopping 89 percent, up five points from a year ago. At the same time, the percentage who said they are “not confident” is down to its lowest level (11 percent) in

the seven years we’ve been doing this work. We also heard that 42 percent of manufacturing executives believe the coming year will be one of economic expansion, up from 37 percent a year ago and up from 34 percent two years ago. This year’s level surpassed the high in 2011 when 40 percent of executives said we were on the verge of an economic expansion. Interestingly, this increased optimism is not necessarily being driven by surging bottom line gains—at least not in the short term. Manufacturers’ predictions about their companies’ gross revenues, profitability and capital expenditures remained relatively unchanged from previous years. Respondents anticipate growth in revenues (45 percent), profitability (30 10

percent) and capital expenditures (27 percent), all very similar to their attitudes over the past three years.

Prominent challenges

Despite their bullish attitudes, manufacturers still cite several potential areas of concern, many of which will look familiar to those who have seen the survey data from previous years. What’s interesting about this year’s data set is that opinions are clearly less intense than in previous years. • Health care costs. The cost of providing health insurance to employees remains the highest concern of manufacturing executives, but the level of concern overall has dropped for the fourth consecutive year. In our 2011 survey, taken immediately after passage of the Affordable Care Act, 71 percent cited health care costs as a serious concern for their firm. Today, that’s down to 56 percent, a drop of three percentage points from a year ago (59 percent). Similarly, health care coverage also remains the top factor for companies when it comes to recruiting and retaining new employees; 46 percent say it is very important. But, that percentage is down five points from last year’s survey (51 percent very important). • Government oversight. This year’s survey data also indicates a conspicuous drop in concerns about government policies and regulations, although it remains the second most prominent concern, with 46 percent saying it is a serious concern compared to 55 percent in 2014 and 58 percent in 2013.

â&#x20AC;˘ Finding and keeping qualified workers. The ability to attract and retain qualified workers continues to be a major concernâ&#x20AC;&#x201D;33 percent identify it as a serious concern to their firmâ&#x20AC;&#x201D;and ranks third on our list of concerns for the fourth year in a row.

Constraints to growth

When asked to rank the one or two biggest challenges that might negatively impact future growth, some noticeable shifts occurred compared with a year ago. Minnesotaâ&#x20AC;&#x2122;s unfavorable business climate (taxes, regulations and business uncertainties) comprises the biggest potential impediment to growth, but its percentage is down five percentage points (43 percent, compared to 48 percent in 2014). A weak economy and the rising costs of energy and materials also both dropped in significance, with the economy falling from 31 percent to 23 percent this year, and energy costs declining from 29 percent to 20 percent. In contrast, concern about health care costs still ranked second and was up 10 percent (41 percent, compared to 31 percent) and the ability to attract and retain a qualified workforce also grew in 2015 to 29 percent, from 20 percent the year before.

More hiring, better pay

The percentage of manufacturers who say their workforce has grown in the past year is at the highest level since we first started asking this question in 2012. Twenty-eight percent said their workforce grew, while 61 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).

said it stayed the same. Only 11 percent said their company’s workforce shrank. Last year, just 23 percent of firms said their workforce had grown over the past 12 months (22 percent in 2013). Interestingly, non-metro firms have a slightly higher growth rate—29 percent compared to 27 percent for metro firms. Thirty-six percent of firms in the West Central Initiative, 32 percent of firms in the IF Initiative (Little Falls), and 30 percent of firms in the Southwest Initiative say their workforce has grown in the past year. While 68 percent of manufacturers say they expect their workforce will stay about the same for the next year, there are about a quarter (28 percent) of firms that report they will be growing their company’s employee base. The biggest level of growth is expected in larger companies: 43 percent for

companies with revenues of $5 million or more and 42 percent for those with more than 50 employees. The most optimistic companies are in the Southwest Initiative (36 percent) and the Southern Initiative (34 percent). Nearly six in ten firms (58 percent) say they have increased wages over the past two years and 61 percent expect that trend to continue for the next two years. Our surveys have shown a consistent rise in wages since 2011 when 41 percent said they had increased wages, with only 2 percent expecting a drop. This tracks closely with the performance of the past two years, in which 58 percent of manufacturers increased wages and only 5 percent decreased them. There was a slight drop (from 25 percent to 22 percent) in companies that expect to invest in employee development in 2015, while 71 percent said their spending will stay the same. It is interesting to note that these numbers have remained virtually unchanged through all seven years of the poll. Similarly, metro firms and large companies are more likely to have formal, structured leadership development programs for supervisors and managers. Despite growing workforces and growing wages, we also continue to see a growing skills gap with manufacturers. The number of executives who said it is difficult to attract qualified candidates to their companyâ&#x20AC;&#x2122;s vacancies grew again in 2015 to 71 percent, up from 67 percent the year before. To illustrate how significant the change has been, in 2010, just 40 percent of executives said attracting qualified candidates to their firmsâ&#x20AC;&#x2122;

vacancies was difficult. The number who say finding candidates is not difficult is at 27 percent, the lowest point in the history of the poll. Metro-based companies reported a notable increase in concern about the skills gap. Last year, we saw a sizeable urgency gap where 75 percent of non-metro companies said it was difficult, far outpacing metro companies (61 percent). This year, the gap has narrowed considerably with 72 percent of non-metro firms and 70 percent of metro firms saying it’s difficult to find the workers they need. The skills gap is most acute in the Southwest

Initiative (86 percent), South Minnesota Initiative (78 percent) and West Central Initiative (76 percent). Even though more metro firms find it difficult to hire qualified candidates, they’re not necessarily more concerned about it. Only 28 percent of metro firms say they are very concerned about the impact not finding qualified workers will have on their firm, compared to 41 percent of non-metro firms. The reason might lie in what these firms say are the biggest challenges they face in attracting qualified candidates. Fully 46 percent of metro firms and 42 percent of non-metro firms say it’s difficult to attract new workers because applicants don’t have the needed skills or education to do the job. While they largely agree on that point, non-metro firms are much more likely to report a lack of applicants or interest (41 percent of all non-metro 15

firms compared to just 28 percent of metro firms) and firm location or geography (20 percent of non-metro firms and 8 percent of metro firms) as significant obstacles to finding qualified workers. On a different question, we also find that 25 percent of non-metro firms say a job candidate has not taken a job with them because of long commuting times or distances. Thatâ&#x20AC;&#x2122;s twice as high as metro firms (12 percent). The need for employees with training and experience is down over last year, 47 percent to 39 percent. The demand for entry-level employees is up slightly (25 percent from 22 percent), while the need for employees with technical training has increased a tad, 23 percent from 21 percent. Machinists (29 percent) and assemblers (23 percent) are the most coveted employees, according to manufacturers. Metro firms were looking for more machinists (32 percent to 25 percent). Engineers were also in greater demand in the metro (13 percent to 6 percent), while the non-metro had a more significant need for welders (14 percent to 4 percent). The expected uptick in Baby Boomer retirements is having a significant or modest impact on 29 percent of Minnesota manufacturers. Nonmetro firms expect it to have a slightly higher impact (31 percent), led by southern Minnesota firms (44 percent). Just 16 percent of northwest Minnesota companies reported an impact. Higher revenue and larger companies expect to experience the greatest retirement challenge: 41 percent of companies larger than $5 million and 40 percent of companies with 50 or more employees say it will have either a significant or modest impact on them. 16

Non-metro firms appear more inclined to solve their workforce issues by collaborating with local educational institutions by a wide margin: 43 percent to 30 percent of metro firms. Companies in the Southern Minnesota Initiative Fund reported the highest interest in collaborations at 58 percent. At the same time, larger companies are also inclined to relationships with educational institutions: 65 percent with revenues over $5 million and 72 percent with more than 50 employees.

Trade

Fewer than one in ten manufacturers (9 percent) say they shipped more than 25 percent of their product overseas last yearâ&#x20AC;&#x201D;the same figure we saw a year ago. Canada (19 percent) and China (13 percent) continue to be seen as the countries with the greatest potential for international business. Minnesota companies appear to be benefiting from the fact that original equipment manufacturers continue to bring their supplier relationships back home after experimenting with relationships in India, China and elsewhere. More than a quarter of them (26 percent) say they have found increased business in the last year from â&#x20AC;&#x153;home-shoring.â&#x20AC;? They say this is due to shorter lead times (30 percent), closer relationships with regional suppliers (25 percent) and total costs versus only product costs (23 percent).

POLL SUMMARY

2015 State of Manufacturing® Survey Field Dates: February 23 – March 18, 2015 Sample Size: N=400 Manufacturing Executives * Denotes result less than 0.5%. ^ Denotes rounding. Due to rounding, some figures may be higher or lower by less than one-half of one percent.

Question 1 Thinking about the upcoming year, in 2015, do you anticipate economic expansion, a flat economy, or a recession? 12/08 8% 34% 56% 2% --

1/10 26% 53% 19%

1/11 40% 49% 9%

1/12 32% 55% 10%

3/13 34% 46% 15%

3/14 37% 54% 7%

3/15 42% ECONOMIC EXPANSION 42% A FLAT ECONOMY 13% A RECESSION

2% 3% 2% 5% 3% 3% DON’T KNOW/UNSURE --1% 1% -- -- REFUSED

Question 2 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 79% 78%^ 83%^82% 82% 84%^89%^TOTAL CONFIDENT 21%^ 21% 16%^17% 17% 15% 11%^TOTAL NOT CONFIDENT 28% 30% 35% 28% 28% 51% 49% 49% 54% 54% 15% 16% 13% 13% 12% 5% 5% 4% 4% 5% * --

36% 49% 13% 2%

40% 48% 7% 3%

1% 1% * * 1% 1% --* * -- --

VERY CONFIDENT SOMEWHAT CONFIDENT NOT VERY CONFIDENT NOT AT ALL CONFIDENT DON’T KNOW/UNSURE REFUSED

Question 3 As you look to 2015, do you project your company’s gross revenues to increase or decrease compared to 2014, or will they probably stay the same? 12/08 1/10 1/11 1/12 3/13 3/14 3/15 23% 44% 51% 47% 41% 45%^45%^TOTAL INCREASE 32% 15% 6%^ 8% 9%^ 7% 7%^ TOTAL DECREASE 11% 29% 30% 25% 25% 23% 25% INCREASE BY MORE THAN 10% 12% 15% 21% 22% 16% 21% 19% INCREASE BY LESS THAN 10% 10% 5% 2% 2% 4% 2% 2% DECREASE BY LESS THAN 10% 22% 10% 5% 6% 6% 5% 4% DECREASE BY MORE THAN 10% 44% 40% 41% 44% 48% 47% 47% STAY THE SAME 1% 1% 2% 1% 1% 2% 1% TOO SOON TO SAY/ DON’T KNOW * * 1% -1% 1% * REFUSED

Question 4 And, as you look to 2015, do you project your firm’s profitability to increase or decrease compared to 2014, or will it probably stay the same? 12/08 1/10 1/11 1/12 3/13 3/14 3/15 17% 36% 39% 31% 32% 35% 30% TOTAL INCREASE 34% 17%^ 11% 13% 17% 17% 9% TOTAL DECREASE 9% 21% 21% 17% 16% 18% 14% INCREASE BY MORE THAN 10% 8% 15% 18% 14% 16% 17% 16% INCREASE BY LESS THAN 10% 13% 8% 6% 7% 9% 10% 4% DECREASE BY LESS THAN 10% 21% 10% 5% 6% 8% 7% 5% DECREASE BY MORE THAN 10% 48% 45% 48% 55% 49% 47% 60% STAY THE SAME 1% 1% 2% * 2% 1% * TOO SOON TO SAY/ DON’T KNOW -* 1% 1% 1% * * REFUSED Question 5 And, as you look to 2015, do you project your firm’s capital expenditures to increase or decrease compared to 2014, or will they probably stay the same? 12/08 1/10 1/11 1/12 3/13 3/14 3/15 19% 24% 32%^27% 28% 27% 27% TOTAL INCREASE 37% 24% 14% 24% 20% 19% 17%^TOTAL DECREASE 9% 16% 20% 15% 17% 17% 14% INCREASE BY MORE THAN 10% 10% 8% 13% 12% 11% 10% 13% INCREASE BY LESS THAN 10% 12% 9% 6% 11% 6% 4% 6% DECREASE BY LESS THAN 10% 25% 15% 8% 13% 14% 15% 11% DECREASE BY MORE THAN 10% 43% 51% 53% 47% 50% 53% 55% STAY THE SAME

Questions 6-14 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. 10

8-10

5-7

1-4 Mean

Competition from foreign sources 3/15 8% 15% 25% 60% 3/14 6% 16% 23% 61% 3/13 7% 17% 26% 56% 1/12 7% 21% 23% 55% 1/11 11% 20% 30% 49% 1/10 12% 27% 24% 48% 12/08 8% 18% 27% 54%

3.9 4.0 4.1 4.4 4.5 4.8 4.2

Managing supply chain relationships 3/15 4% 9% 35% 56% 3/14 3% 11% 39% 49% 3/13 3% 10% 38% 51% 1/12 4% 15% 39% 45%

4.0 4.4 4.1 4.6

Government policies and regulations 3/15 28% 46% 30% 23% 3/14 30% 55% 29% 17% 3/13 32% 58% 24% 18% 1/12 33% 56% 29% 15% 1/11 31% 61% 26% 12% 1/10 38% 57% 25% 16%

6.7 7.1 7.2 7.3 7.6 7.3

The costs of health care coverage 3/15 34% 56% 24% 20% 3/14 36% 59% 20% 20% 3/13 44% 67% 17% 14% 1/12 36% 68% 17% 13% 1/11 43% 71% 17% 8% 1/10 42% 68% 17% 13% 12/08 36% 64% 21% 13%

7.0 7.2 7.7 7.7 8.2 7.8 7.7

8-10

5-7

1-4

Mean

Costs of employee salaries and benefits, not including health insurance 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 Attracting and retaining qualified workers 3/15 12% 33% 36% 30% 5.7 3/14 10% 34% 35% 30% 5.8 3/13 9% 30% 32% 35% 5.4 1/12 11% 31% 32% 37% 5.5 1/11 4% 14% 37% 45% 4.6 1/10 8% 19% 27% 51% 4.4 12/08 8% 22% 31% 45% 4.8 Economic and global uncertainty 3/15 12% 29% 43% 28% 3/14 11% 31% 46% 24%

5.8 6.0

The shipping and logistics of getting your products to market 5% 14% 27% 58% 4.0 Future leadership within firm 4% 13% 32% 54%

3.9

Summary of Concerns â&#x20AC;&#x201C; Ranked By % 10

Concerns

%10

%8-10

Mean

The costs of health care coverage Government policies and regulations

34% 28%

56% 46%

6.7

Attracting and retaining qualified workers

12%

33%

5.7

Economic and global uncertainty

12%

29%

5.8

18%

5.0

15%

3.9

14%

4.0

5% 4%

13% 9%

3.9 4.0

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

7.0

Question 15 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 48% 43% Unfavorable business climate, such as taxes, regulations and policy uncertainties 31% 41% Rising health care and insurance costs 21% 29% Attracting and retaining a qualified workforce 31% 23% Weak economy and lower sales for your products 29% 20% Rising costs of energy and materials for your products 3% * *

4% OTHER 1% DON’T KNOW/NOT SURE * REFUSED

Question 16 Thinking ahead…what would you say are the two or three most important drivers of your firm’s future growth? 75% 40% 25% 19% 3%

New customers New products Developing company managers and leaders Enhancing supply chain relationships Achieving ISO Certification

6% OTHER 23

Questions 17-21 Changing the focus somewhat to attracting and recruiting new employees to your firm...I am going to read a series of factors and, after I read each one, please tell me how important that particular factor is to your firm in attracting workers, using a one to ten scale where one means that factor is NOT IMPORTANT AT ALL and where ten means that factor is VERY IMPORTANT. You can choose any number between one and ten depending on how strongly you feel about it. 10

8-10 5-7

1-4

Mean

Salary and wage expectations 3/15 7% 27% 48% 24% 3/14 5% 32% 47% 21% 3/13 8% 25% 53% 21% 1/12 5% 22% 50% 26% 1/11 7% 29% 47% 21% 1/10 12% 38% 42% 14% 12/08 9% 43% 45% 10%

5.6 6.0 5.7 5.6 5.9 6.5 6.8

Affordable health care 3/15 26% 46% 28% 3/14 23% 51% 27% 3/13 27% 54% 25% 1/12 25% 50% 30% 1/11 22% 45% 29% 1/10 17% 39% 30% 12/08 14% 39% 36%

24% 22% 20% 17% 22% 23% 21%

6.5 6.7 6.8 6.9 6.5 6.4 6.3

Competitive benefits package 3/15 9% 26% 40% 34% 3/14 7% 25% 46% 28% 3/13 8% 27% 44% 29% 1/12 6% 22% 48% 28% 1/11 10% 31% 39% 23% 1/10 9% 32% 38% 23% 12/08 9% 35% 42% 19%

5.3 5.5 5.5 5.4 5.8 5.9 6.2

8-10 5-7

1-4

Flexible work schedules 3/15 5% 16% 34% 3/14 4% 13% 35% 3/13 3% 12% 36% 1/12 5% 14% 40% 1/11 6% 20% 34% 1/10 7% 30% 38% 12/08 12% 32% 44%

Mean 49% 51% 50% 43% 41% 26% 22%

4.3 4.3 4.1 4.5 4.8 5.7 6.1

The need to accommodate part-time workers 3/15 4% 11% 27% 61% 3.6 3/14 2% 7% 27% 64% 3.5 Summary of Employee Recruitment Factors – Ranked By % 10 Employee Recruitment Factors

%10

%8-10

Mean

Affordable health care

26%

46%

6.5

Competitive benefits package

26%

5.3

Salary and wage expectations Flexible work schedules

7% 5%

27% 16%

5.6 4.3

The need to accommodate parttime workers

11%

3.6

Question 22 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 54%^ 58% TOTAL INCREASED 6%^ 5% TOTAL DECREASED 15% 20% INCREASED CONSIDERABLY 40% 38% INCREASED A LITTLE 2% 2% DECREASED A LITTLE 5% 3% DECREASED CONSIDERABLY 37% 35% STAYED THE SAME 3% --

1% DON’T KNOW 2% REFUSED 25

Question 23 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 63% 61% INCREASE 3% 2% DECREASE 33% 36% STAY ABOUT THE SAME 1% --

1% DON’T KNOW 1% REFUSED

Question 24 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 2014, 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 19% 18% 17% 18% 25% 22% WILL INVEST MORE 10% 8% 8% 12% 7% 6% WILL INVEST LESS 67% 71% 72% 68% 67% 71% STAY THE SAME 1% 3%

2% 3%

1% 1%

1% *

* *

DON’T KNOW REFUSED

Question 25 Does your company have a formal structured leadership development program for supervisors and managers? 20% 80% * *

YES NO DON’T KNOW/UNSURE REFUSED

Question 26 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 27%^ 22%^ 23% 28% TOTAL GREW 16%^ 16% 14%^ 11% TOTAL SHRUNK

8% 18% 11% 6%

6% 7% 7% GREW A LOT 17% 16% 21% GREW A LITTLE 9% 9% 8% SHRUNK A LITTLE 7% 4% 3% SHRUNK A LOT

56%

60% 62% 61% STAYED ABOUT THE SAME

* 1%

1% 1%

1% --

DON’T KNOW/UNSURE REFUSED

Question 27 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 29%^ 25%^ 30% 28% TOTAL GROW 2%^ 5%^ 2% 4% TOTAL SHRINK 4% 24% 2% 1%

3% 5% 4% GROW A LOT 23% 25% 24% GROW A LITTLE 4% 2% 2% SHRINK A LITTLE 2% * 2% SHRINK A LOT

68%

69% 67% 68% STAYED ABOUT THE SAME

* *

* --

1% --

DON’T KNOW/UNSURE REFUSED

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

Significant impact Modest impact Only a minor impact No impact at all DON’T KNOW REFUSED

Question 29 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 55%^ 40% 45% 58%^ 60% 67% 71% TOTAL DIFFICULT 43% 55% 50%^ 39% 36% 32%^ 27% TOTAL NOT DIFFICULT 18% 36% 22% 21%

14% 26% 24% 31%

17% 28% 25% 26%

22% 37% 26% 13%

22% 38% 19% 17%

29% 38% 19% 12%

1% 1%

1% 4%

2% 3%

1% 2%

3% 1%

1% *

27% 44% 13% 14%

VERY DIFFICULT SOMEWHAT DIFFICULT NOT TOO DIFFICULT NOT DIFFICULT AT ALL

2% DON’T KNOW 1% REFUSED

Question 30 For what reasons have job candidates not taken a job or followed through with an interview? 52% 27% 23% 18% 16%

Skills required mismatched Compensation is not high enough Limited/lack of upward job mobility Long commuting time/distance Work schedules not flexible enough, don’t work out

17% 6% 1%

OTHER DON’T KNOW REFUSED

Question 31 (ASKED IF DIFFICULT) What would you say is the biggest challenge your firm faces in attracting qualified candidates? If Diff 62% 48% 34% 19% 18% 9% 8% 6%

Total 44% 34% 24% 14% 13% 6% 6% 4%

Applicants do not have the needed skills or education Lack of applicants or interest Firm too small to competitively recruit Inability to offer competitive wages Firm location or geography Climate Inconvenient work hours Dirty facilities

5% Something else

1% *

* *

DONâ&#x20AC;&#x2122;T KNOW REFUSED

Question 32 When looking to hire new employees, where is your need greatest? 3/13 20% 19% 49% 6%

3/14 22% 21% 47% 6%

3/15 25% 23% 39% 6%

-4% 1% 1% 1%

1% 1% -1% 1%

-4% 1% 1% *

Entry-level employees Employees with technical training Employees with technical training and experience Employees with four year college degrees ALL OF THE ABOVE Other Depends DONâ&#x20AC;&#x2122;T KNOW REFUSED

Question 33 What types of manufacturing jobs or positions are in most demand at your company? 29% 23% 10% 9% 4%

Machine operator Assembler Engineer Welder Supervisor

22%

Other

2% 1%

DON’T KNOW REFUSED

Question 34 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 33% 10% 23%

3/15 36% TOTAL YES 13% YES, A LOT 23% YES, A LITTLE

61%

62% NO

4% 1% *

* MAYBE/TOO SOON TO TELL 1% DON’T KNOW * REFUSED

Question 35 Does your firm collaborate with local educational institutions for workforce training or other programs? 36% 63% 1% --

YES NO DON’T KNOW/UNSURE REFUSED

Question 36 How much of your product did you ship internationally in 2014? 12/08 1/10 1/11 1/12 3/13 3/14 3/15 94% 94% 92% 91%^ 93% 89%^ 89% 25% OR LESS 6%^ 5% 8% 8%^ 6% 9% 9% 26% OR MORE 58% 31% 5% 4% 1%

58% 56% 52% 56% 51% 56% NONE 29% 28% 29% 29% 23% 24% 10% OR LESS 7% 8% 9% 8% 14% 9% BETWEEN 11% TO 25% 4% 6% 7% 4% 4% 5% BETWEEN 26% TO 50% 1% 2% 2% 2% 5% 4% 51% OR MORE

2% DON’T KNOW/ NOT SURE 1% REFUSED

Question 37 In what part of the world do you see greatest increase in prospective business? 1/12 20% 22% 10% 1% -10% 6% --

3/13 22% 19% 9% --13% 4% --

3/14 3/15 17% 19% CANADA 12% 13% CHINA 13% 8% EUROPE 10% 8% ASIA 7% 6% MEXICO 5% 4% SOUTH AMERICA 2% 3% INDIA 4% -- UNITED STATES

1% 14% 10% 2%

2% 1% 10% OTHER 19% 17% 21% NONE OF THE ABOVE 10% 12% 9% DON’T KNOW/NOT SURE 1% 1% 1% REFUSED

Question 38 Have you gained new OEM customers from them wanting to have suppliers closer to their company? 26% 71% 3% *

YES NO DON’T KNOW/NOT SURE REFUSED

Question 39 (ASKED IF GAINED NEW OEM) What would you say is the main reason why your supply chain relationships changed? If Gain Total 30% 8% 25% 6% 23% 6% 12% 3% 10% --

Shorter lead times Closer relationships/regional suppliers Total costs versus only product costs Better inventory management by the OEM

3% DON’T KNOW/NOT SURE -- REFUSED

Question 40 On a different topic, does your firm have a formal strategic growth plan? 39% 59% 1% *

YES NO DON’T KNOW/NOT SURE REFUSED

Question 41 Which ONE of the following best describes most of your firm’s customers and potential customers expectations about ISO certification? 7% 10% 27% 53% 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 42 How many people does your company employ in all its facilities in Minnesota? 12/08 1/10 1/11 1/12 3/13 3/14 3/15 86% 89% 83% 86% 85% 80% 79%^UNDER 50 7% 7% 9% 9% 7% 11% 10% 51-150 6% 4% 8% 4% 6%^ 8% 6% OVER 150 86% --7% -2% 4%

89% 83% 60% 61% 47% 55% UNDER 10 --- 15% 13% 21% 14% 11-25 --- 11% 11% 12% 9% 26-50 7% 9% 5% 5% 8% 5% 51-100 --4% 2% 3% 5% 101-150 2% 2% 1% 3% 3% 2% 151 TO 250 2% 6% 3% 4% 5% 4% MORE THAN 250

1% DON’T KNOW/ NOT SURE 5% REFUSED

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

23% 25% 22% 22% 26% 23% MORE THAN $1M TO $5M 6% 7% 7% 5% 12% 6% MORE THAN $5M TO $10M 5% 6% 5% 3% 7% 5% MORE THAN $10M TO $20M 6% 11% 8% 10% 10% 10% MORE THAN $20M 5%

6% 14% DON’T KNOW/NOT SURE/REFUSED

Question 44 Which one of the following best describes your company’s primary business? Is it... 12/08 1/10 1/11 1/12 3/13 3/14 3/15 13% 16% 15% 13% 14% 17% 20% METAL FABRICATION 37% 29% 22% 17% 26% 25% 18% PRECISION MANUFACTURING 16% 14% 16% 30% 13% 13% 14% PROCESS MANUFACTURING 12% 15% 13% 10% 12% 30% 14% AN ORIGINAL EQUIPMENT MANUFACTURER, OEM 4% 5% 7% 6% 4% 5% 5% PLASTICS 4% 3% 6% 5% 1% 5% 3% ELECTRONICS COMPONENTS ------3% OTHER MANUFACTURING 3% 2% 3% 2% -2% 1% INFORMATION TECHNOLOGY, IT -1% *

1% -1%

3% * *

3% -1%

7% 1% 1%

4% 17% SOMETHING ELSE -* DON’T KNOW * 4% REFUSED

Question 45 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 * -* 1% * * LESS THAN 1 YEAR 5% 2% 1% 1% 2% 1% 1-3 YEARS 8% 6% 5% 4% 1% 4% 4-6 YEARS 13% 11% 12% 10% 6% 5% 7-10 YEARS 13% 9% 11% 14% 10% 12% 11-15 YEARS 60% 71% 69% 70% 81% 74% 16 YEARS OR MORE ---

* --

* *

-1%

* --

* DONâ&#x20AC;&#x2122;T KNOW 4% REFUSED

Question 46 And, in what year were you born? 12/08 5% 13% 37% 28% 14%

1/10 3% 15% 37% 29% 15%

1/11 3% 11% 35% 32% 17%

1/12 4% 9% 30% 35% 22%

3/13 3% 10% 30% 35% 20%

3/14 1% 7% 29% 40% 22%

3/15 3% 7% 26% 37% 19%

18 - 34 35 - 44 45 - 54 55 - 64 65 AND ABOVE

8% REFUSED

Question 47 Gender 12/08 1/10 1/11 1/12 3/13 3/14 3/15 76% 83% 86% 84% 84% 86% 81% MALE 24% 17% 14% 16% 16% 14% 19% FEMALE Question C What is your job title? 12/08 1/10 1/11 1/12 3/13 3/14 3/15 38% 50% 43% 42% 41% 40% 40% Owner 19% 21% 24% 22% 20% 26% 22% President 7% 6% 5% 4% 11% 6% 9% Vice President 16% 9% 13% 17% 12% 14% 9% Manager 5% 5% 6% 6% 4% 5% 4% Chief Executive Officer 2% 1% 2% 1% 2% 3% 3% Chief Financial Officer 35

1% ---3% -1% 1% 1% --2% * 1% 1% ---1% ---

--* -* -* * 2% --1% ----* --* --

1% -----2% 1% * --1% ----* -* ---

1% -* -----2% --* -----1% * ---

* -* -----1% --1% ----* 1% * * --

--* 1% * -* * 1% --1% 1% ---------

2% 1% OTHER

2% 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% * * * * * ------

Managing Officer Director of Engineering Executive Vice President Director Division President Director of Sales President of Operations Managing Partner Partner Operations Director HR Officer Chief Operating Officer Division Vice President Chief Administrator Executive Officer Chief Technical Officer Founder Controller Chairman Chief Credit Officer Vice Chairman

ISSUE ANALYSIS

Manufacturing Insights

Getting e-Commerce Strategy Right The history of B2B and manufacturing e-commerce By Kurt Schroeder, Principal, Baker Tilly

hile the growth of the overall B2B e-commerce channel has been substantial over the last ten years, many analysts consider this period of time a lost decade for B2B e-commerce models. Companies have rapidly built their online presence in an attempt to take corporate buyers advantage of the promises of the online believe suppliers channel. Likewise, many manufacturing need to invest more organizations have jumped on the latest technology and integration standards as the in making the online next best highway to ride and are chasing experience of B2B phantom competitors who threaten their as easy as B2C market position. Global and ubiquitous access to customers lured established manufacturing companies and new startups to invest in the online channel. However, in their rush to establish an online

47 of 50

presence, most early adopters did not concern themselves with the customer experience they were creating, which caused them to confuse their customer, lose money, and in some cases, go out of business altogether. The failures, notable and obscure, are all too numerous. Dell Computer is an example of a well-established, successful manufacturing company that looked to extend its brand and success via e-commerce, only to experience early failure in its B2B strategies. Citing lack of customer readiness to make use of an electronic marketplace, Dell’s online marketplace was shut down after only four months. Others believe that Dell’s strong name recognition may have worked against it, causing the company to be viewed as purely a computer manufacturer rather than a source for alternative business products. Regardless, Dell’s early experience is an example of the wrong strategy and a failure to understand the perspective of their customers. As B2B and manufacturing e-commerce has emerged over the last decade, a common thread in the success stories and failures is strategy. In general, manufacturing organizations that developed a strategy before they began investment experienced greater success than those that did not. Furthermore, in more recent years, organizations that are aligning their e-commerce strategy with their customer strategies are experiencing significant improvement in customer experience, top line growth, and customer retention.

The case for strategy

With the potential opportunity being so large, why are manufacturers and other B2B organizations continuing to fall short of their objectives and their customers’ expectations? Why is it so difficult to get e-commerce right? For starters, it can be complex: •

Rapidly changing B2B customer expectations are being shaped by B2C experiences. This trend is only likely to increase in the coming years.

•

Online competitors in almost every industry are emerging. In many cases, they are not encumbered with traditional thinking about how to reach customers. That mythological new entrant to your market who threatens to disintermediate or take your customers by exploiting new online and e-commerce strategies is now a real threat, whether a current identified competitor or one previously unknown.

•

Channel conflict is real, both internally and externally. Moving customers online can be a perceived or real threat to a company’s direct sales organization. Increasing market presence through the e-commerce channel can have unintended consequences with current customers.

•

Technology advancements and the urge to focus on technology as the silver bullet can confuse an organization’s strategy, putting the cart before the horse.

While all of these pressures are real, in most cases a lack of focus on fundamental strategies is the root cause for manufacturing organizations’ e-commerce initiatives not meeting objectives. These strategies begin with aligning an organization’s e-commerce objectives with their customer strategies, specifically customer acquisition, retention, and growth. Many organizations view what they are doing in the e-commerce channel as somehow separate and unique from what they are doing with their customers in other channels. B2C expectations have changed and have actually increased B2B customer expectations for their experience, regardless of the channel. Many manufacturing organizations fail to fully understand these expectations and how to align their e-commerce strategy to support it. Conversely, manufacturing organizations that focus on aligning their e-commerce strategy with their overall customer experience strategy can turn the pressures of increased customer expectations, competition, channel, and technology complexity into opportunities. The e-commerce channel is highly scalable and can provide access to new customers, as well as impact customer satisfaction and retention. Organizations are no longer bound by the number of sales people they can hire and train, which not only increases speed and scalability, but reduces customer acquisition costs. In addition, the online channel raises the bar on the ability to serve customers and improve the customer experience regardless of the channel the customer uses.

Strategy considerations

As you define your e-commerce strategy, remember that it needs to 39

be viewed as an extension and enhancement of your overall customer experience strategy. Research conducted by Gartner in late 2011 indicated that 86% of customers said they would pay more for a better customer experience. Furthermore, some estimates conclude that poor customer experience costs companies over $330 billion a year. So before you define your e-commerce strategy, you must ask yourself, “Do I understand what my customer experience strategy is?” If not, you must understand what your customers and the marketplace expect before you can make decisions about your e-commerce strategy.

86% of customers

said they would pay more for a better customer experience.

•

Define vision and strategy using Voice of Customer, interviews and segmentation. You can’t create a positive customer experience without asking your customers if they value your organization and how they want to be treated. Understanding the differences within your customer segments is also important. What works for one, will not work for all. Customer intimacy is driven from personalized interactions with the individual customer. When you have an understanding of this from the outside in, you can align your e-commerce strategy more effectively.

•

Study other companies that have created excellent customer experiences. Look for analogous models of great customer experiences that have been extended and enhanced via the e-commerce channel. Assess the potential for adoption of those models in your organization. Our experience shows that many of the best ideas come from organizations outside your industry that have faced similar challenges.

Be mindful of these key points as you think about your e-commerce strategy: •

Address channel conflict early. Many manufacturing organizations admit that they are undermanaging channel conflict and, therefore, leaving the potential for e-commerce growth on the table. Whether the conflict exists within segments of your customers or in your direct sales organization, it is critical to proactively manage and overcome channel conflict when building online channels. Creating a win-win for your customers, direct sales organization, and your e-commerce channel is possible, but finding the win-win won’t happen by accident. 40

Define your key customer strategies and how e-commerce can support them Customer acquisition Adopting B2C practices in your B2B manufacturing strategy can be a powerful way to drive acquisition of new customers and revenue growth. Since over 85% of all purchases start with an internet search, it is vital to be in the right place, at the right time, with the right message to get customers into your â&#x20AC;&#x153;home court.â&#x20AC;? Once you have them, the right content, products, and pricing are key to keeping them there and moving them through the purchasing journey. Personalization, online catalogs, content, and SEO techniques should be key ingredients in your strategy to support improved customer acquisition. Small improvements in these areas can lead to big gains. Customer retention Migrating customer segments to online channels can improve the customer experience and lower the cost to serve. Make it easy for existing customers to do business with you by leveraging the online channel. Making it easier to find, compare, and purchase products will increase customer loyalty. At the same time, the online channel can decrease the cost to serve your customers as more self-serve options become available. Understanding what your customers want is essential before deciding to build these capabilities. Customer growth Modern e-commerce platforms provide tools that enable manufacturing companies to segment their customers, understand their buying behaviors, and personalize the online experience with user specific content and products. A positive customer experience leads to increased purchases. Advanced search, guided navigation, rich content, cross sell, upsell, and product recommendations can drive customers to purchase more. By migrating B2B customers online, companies have seen a 44% increase in Average Order Value (AVO) and experienced a reduction in acquisition and support costs.

It requires a strategy to get there, to manage the change, and to adjust based on results. â&#x20AC;˘

Strategy never sleeps. Remember that customer expectations are constantly changing. Channels, competitors, and capabilities continue to evolve. Expect that your e-commerce strategy will need to evolve as well. You will need to consider a roadmap for change that will allow 41

you to invest, measure, and adjust accordingly, along with an internal mechanism to continually monitor the marketplace for changes that could impact your strategy. •

Capabilities matter, but that’s the next step. A common mistake that many organizations make is focusing on the development or acquisition of capabilities for their e-commerce channel without having fully thought through what they really need. Understanding your customer experience strategies and how the e-commerce channel can best enable them will allow you to invest very pragmatically versus “spraying and praying.”

Conclusion

The data is clear. The potential of the manufacturing B2B e-commerce channel is significant. However, winning in this growing channel is not a certainty. Organizations that recognize their e-commerce success is driven in great part by its alignment to a strong customer experience strategy will win in the end. The time is now. B2B customers are demanding a world-class experience. With online sales expected to eclipse traditional sales within the next few years, it is critical for manufacturing companies to fundamentally rethink their business and customer experience strategies. Develop a plan forward that aligns the strategies, investments, and capabilities to fully capitalize on this growing channel. It is time for manufacturing leaders to get in the game. E-commerce has the potential to transform a slow-growth offline business into a high-growth online and multichannel enterprise deserving of a serious investment of time, money, and mindshare. Are you positioned to win in the growing e-commerce channel?

About Baker Tilly

Baker Tilly Virchow Krause, LLP (Baker Tilly) is a nationally recognized, full-service accounting and advisory firm whose specialized professionals connect with clients and their businesses through refreshing candor and clear industry insight. With approximately 2,500 employees across the United States, Baker Tilly is ranked as one of the 12 largest accounting and advisory firms in the country. Headquartered in Chicago, Baker Tilly is an independent member of Baker Tilly International, a worldwide network of independent accounting and business advisory firms in 133 countries, with 27,000 professionals. The combined worldwide revenue of independent member firms is $3.6 billion. Baker Tilly’s growth strategies professionals specialize in helping clients achieve their growth objectives by effectively blending strategy with a 42

focus on implementation and execution. Our growth strategy services offer pragmatic approaches, looking at the full set of capabilities our clients must consider to achieve their growth objectives. Our online experts guide organizations to consider how digital marketing and e-commerce can effectively support broader customer experience strategies and objectives of the organization, how to look at the capabilities that will be required to improve online performance, and the right way to invest in their online channels.

ISSUE ANALYSIS

Made in Minnesota By The Minnesota Department of Employment and Economic Development

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 U.S. 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 U.S. 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 44

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 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 instate 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 send a registration form through Survey Gizmo, a popular online survey tool. Seven follow-up reminders were sent to these businesses. Cards with a link to the online registration form also were mailed to businesses, and the agency’s business representatives invited manufacturers to complete the form so that they could be listed in the directory. Additionally, nearly 500 economic development groups 45

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 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 a diversity of 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 she thought 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 46

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. Among other companies in the directory: •

Battle Lake Outdoors makes high-quality back packs, 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 business has 45 employees.

To get a clearer picture of all the companies in the directory, DEED conducted an analysis in December 2014 that examined businesses by types and locations. According to the study, 420 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 (10 percent) and northeast (8 percent). Of the Twin Cities companies listed in the directory, 42 percent (178) were in Hennepin County. Remaining companies were in the following metro counties: Ramsey (17 percent), Anoka (15 percent), Dakota (13 percent), Washington (5 percent), Scott (3 percent) and Carver (3 percent). Seventeen percent of the businesses in the directory were owned by women, 7 percent were owned by veterans and 2 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 38 percent having nine or fewer employees. Sixteen percent had 10 to 19 employees, 20 percent had 20 to 49 employees, and 26 percent had 50 or more employees. Among the products made by companies listed in the directory, fabricated metal products were the most common, manufactured by 27 percent (247) of the businesses. Other major products manufactured by Made in Minnesota companies were miscellaneous products (237), machinery (122), printing materials (93), primary metal products (100), furniture (77), wood products (65), plastics (80), and computers and electronics (64). A separate part of the directory listed products used in renewable energy or energy conservation, including appliances, building controls, windows and doors, solar photovoltaic components, wind turbine structures and wind turbine generators. 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 costeffective 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 48

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. More than 200 manufacturers in the directory indicated they make renewable energy products, with the largest number (78) producing heating, ventilation and air conditioning systems. Others make fuel cells, recycled paper, seating for electric vehicles, wind turbine generators and components, windows and doors, building controls, solar photovoltaic components and solar thermal parts The directory has continued to grow since it was launched and today contains more than 900 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. The directory remains a work in progress. Companies that want to be listed for free can register at http://www.surveygizmo.com/s3/1025069/ made-in-mn-public. 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.

ISSUE ANALYSIS

Distribution Dilemmas Avoiding conflicts with customers and collusion with competitors By Quentin R. Wittrock Shareholder at Gray, Plant, Mooty, Mooty & Bennett, P.A.

Manufacturers always desire to improve the ways they sell, store, ship,

and service the products they make. Improvement requires change. Change, in turn, tends to leave some former distribution partners or would-be competitors on the outside looking in. It is in these situations when disputes, threats, and even litigation can result. It is in these same situations, therefore, when the manufacturer is best served by having clear documentation in its files, having legal compliance programs in place, having trained its employees how not to violate antitrust laws and other legal boundaries, and by having understood and followed rules relating to pricing, exclusivity, and termination. The case study at the end of this article demonstrates how all of these preventive measures can allow a manufacturer to take the steps necessary to improve its business through a change in distribution. Changes and the resulting conflicts most frequently arise in the following scenarios: â&#x20AC;˘ The manufacturer concludes it can reach customers more effectively and get products to them more efficiently by â&#x20AC;&#x153;selling directâ&#x20AC;? rather than through intermediaries. Direct selling can occur from the manufacturer to dealers, bypassing two-step wholesale distributors 50

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(i.e., wholesalers who buy, warehouse, resell, and deliver the manufacturer’s products to independent dealers). Or, the direct relationship can be between the manufacturer and the end-users, bypassing all independent wholesalers and dealers. “Fewer, stronger dealers” is adopted as a business strategy. The manufacturer believes it can compete better and grow market share best through a dedicated sales force employed by the manufacturer rather than through independent sales representative organizations. In the course of a merger or acquisition, the manufacturer consolidates its distribution.

In each of these scenarios, the manufacturer faces both business and legal risks. On the business side, what if existing distributors, dealers, or sales representatives have relationships with end users that allow them to steer business to your competitors’ product lines? Legally, what if your soon-to-be-former distribution and sales partners go to lawyers in an attempt to force you to continue those relationships, or, to compensate them for losing access to your lines? What if, heaven forbid, termination of distributors, dealers, or sales representatives brings out claims that you have been engaging in unlawful activity, most commonly alleged to be violations of antitrust laws? Indeed, it is termination (or other significant change) that leads to most distribution disputes and litigation. At the very least, terminated partners often demand that unsold inventory be bought back, or that more time be allowed before the change occurs. Sometimes these parties insist that their entire business or significant assets be purchased to repay them for the “harm” they will suffer due to termination. Often, they welcome termination as opening the door to an exit strategy, and they simply demand a large sum of money to go away, sometimes using alleged antitrust violations by the manufacturer as leverage to force a buyout. To weigh these risks, manufacturers contemplating distribution changes should first review two basic things: (1) what the contracts they have in place allow and require; and (2) what is mandated by state and federal law. Many contracts, and the existing laws in many states, delineate when termination is allowed and on what grounds, how much notice is required, whether inventory must be repurchased, what commissions must be paid to sales representatives upon or after termination, whether the manufacturer has the right or obligation to buy business assets, and what rights and obligations the parties have regarding post-termination competition. Intellectual property, such as trademarks, confidential information, and trade secrets, may also be protected. 51

Antitrust Considerations

Antitrust law provides an entirely separate, but equally important, set of risks that generally do not get mentioned by distributors or dealers until termination is imminent. Pricing is the most frequent topic of antitrust concern, as companies wrestle with how to avoid “price discrimination” in selling to their various customers. It is common knowledge in business that suppliers do not charge all buyers the same price. Yet most also know that a federal antitrust law (the Robinson-Patman Act) on its face seems to require that all customers—at least to the extent the customers compete against each other in reselling the products—be treated equally not only in price but in promotional support. Given these dueling realities, there is plenty of room for misunderstandings to turn into legal claims, particularly when termination is occurring due to failure of the dealer’s business. The key to avoiding or defeating price discrimination claims is to understand and apply the exceptions to the requirement of equal pricing. For example, the law allows companies to have “programs” in place that allow for greater discounts to customers who meet published criteria, such as growth, loyalty, or volume. The availability of such programs can insulate the seller from liability, so long as the program is reasonably attainable and will not destroy competition by significantly favoring just one or a handful of buyers. Programs like this also can be effective tools to motivate dealers and distributors to sell the manufacturer’s products instead of competitors’ brands. Other legally permitted exceptions to the law prohibiting price discrimination, such as “meeting competition,” also can allow the manufacturer flexibility to increase sales while obeying the law. Control of resale pricing is another distribution-related antitrust issue. For a century, suppliers were strictly forbidden from agreeing with their dealers and distributors as to resale prices down the distribution chain. That has changed in recent years, at least under federal law in the United States. Now, the more important question is the state or country in which resale control is sought to be exerted, as state and country laws vary. The economic effects and the reasons for the control also matter. Given these nuances, companies increasingly are adopting Minimum Advertised Price (“MAP”) programs. The rise of internet resellers also has fed this practice, with some companies specifically calling their programs “iMAP” policies, limiting them to control of price advertising on the internet. A decision to terminate often is linked to the topic of resale pricing generally and MAP programs specifically, as termination might be a dealer or distributor’s punishment for not following the manufacturer’s resale pricing requirements or policy on price advertising. Exclusive arrangements are a third common category of legal concern for manufacturers who sell through independent distribution. These 52

arrangements run the gamut from the traditional practice of granting exclusive territories, to requiring dealers not to sell competing lines. The latter option provides a form of exclusivity to the manufacturer. Like challenges regarding pricing parity and controls on pricing and advertising, disputes about whether exclusivity requirements are being followed often arise when the parties are nearing the end of their relationship. Collusion with competitors provides the most serious form of antitrust risk—“go to jail” serious. Certain forms of collusion—such as bid rigging and price fixing—are criminal offenses, and individuals receive prison sentences when they engage in such conduct on behalf of their companies. The more common forms of collusion are much closer to the line that divides legal collaboration from illegal “conspiracy” to restrain trade. Trade association activity, while generally legal, can lead to competitors working together too closely and ending up in trouble. Worries arise when competitors discuss a merger or acquisition: How soon can they start presenting a unified face to customers on central terms such as pricing and who deals with whom? Joint ventures by their nature involve competitors cooperating, thus the collusion line is never far away and needs to be watched closely in all joint venture discussions. What about bid situations? When a customer wants to use the manufacturer’s product but needs multiple bids, what involvement can the manufacturer have in working with various potential bidders, or in submitting a factory-direct bid itself? Or, when a competitor is also your customer or supplier for certain components or in a particular geographic area, it is tricky to separate the cooperation needed in any buyer-seller relationship from the collusion generally forbidden of competitors. Perhaps the most common antitrust “collusion” problem for manufacturers occurs not at the manufacturing level itself, but when independent dealers conspire among themselves to rig bids or fix prices, and then the dealers attempt to draw the manufacturer into their illegal arrangement. In this scenario, some dealers may complain about other dealers, and they may ask the manufacturer to “police” their anticompetitive agreement. They also may ask the manufacturer to participate directly by agreeing that its company-owned distribution outlets or direct sales activities will be curtailed to facilitate the dealers’ arrangement. Vexing issues face the manufacturer who wants to do the right thing legally while seeing to it that its good dealers are profitable and happy.

Preventive Measures for Manufacturers

Prevention is the best cure for antitrust problems in all of the above scenarios, as the time of termination or after a claim has been lodged both are too late. We recommend that manufacturing companies review their compliance 53

with antitrust laws by formally gathering and scrutinizing all of their pricing programs, sales policies, competitor communications, and customer agreements, among other documents, to uncover and defuse landmines. Sales leadership and other executives should be interviewed regarding their interactions with customers and, crucially, any competitors with which your company has contact. Top management should receive a report of this compliance review. Training should be provided to all involved. This can be accomplished through legal sessions presented at company-wide sales meetings, for example, and through online training modules that are made mandatory for all employees who deal with customers or competitors. Carefully drafting documents is a third good way to avoid legal liability before terminations occur and claims arise. Having clear contracts, policies, and programs in place should avoid most disputes about termination, pricing, and resale controls. In the same vein, having clear documentation of what is and is not a part of the relationships with competitors is crucial in avoiding collusion.

Case Study

In January of 2015, following a nine-day jury trial at the federal courthouse in St. Paul, our client won a jury verdict defeating all counts in a product distribution/antitrust case. This lawsuit followed the decision of our client—a manufacturer of fireplaces and related products—to terminate its wholesale, two-step distributor in Pennsylvania, Ohio, Maryland, and West Virginia, and to sell direct to several dozen dealers in those areas. The terminated distributor alleged antitrust, contract, and tort claims against our client and a large Pennsylvania dealer, which was our client’s co-defendant. Following termination, the plaintiff went out of business after 30 years as our client’s distributor, and it claimed at trial to have lost its entire business value of $3.5 million, plus other “lost profits.” All told, with potential damages tripled under antitrust law, the plaintiff was seeking more than $10 million plus attorney’s fees, which were substantial. The plaintiff was represented by an experienced large-firm lawyer from Pittsburgh, Pennsylvania along with a major Minneapolis-based law firm. After eight hours of deliberation, the jury answered “no” on the questions of whether there was an antitrust conspiracy, breach of contract, and tortious interference. This provided a complete trial victory for our client. (Price discrimination claims had been dismissed by the judge earlier in the case.) The case was of great importance to all concerned. In addition to not wanting to get hit with a large judgment, our client wanted confirmation of its right as a manufacturer to terminate wholesale distributors and other intermediaries when it wants to sell directly to dealers or to others down 54

the product distribution chain. Many of our manufacturing clients struggle with this same desire to improve their competitiveness and profitability by eliminating long-time wholesalers who no longer add sufficient value. Key issues in this case included whether statements and documents created an “implied” contract precluding termination except with good cause, and whether the manufacturer had “conspired” with the large Pittsburgh dealer to eliminate as competitors the plaintiff wholesaler and some other Pittsburgh-area dealers the wholesaler had supplied. As is often the case with our manufacturing clients who use our firm for product distribution matters, this client had asked us in advance whether it had the legal right to terminate this wholesale distributor. We had advised that termination would be legal, as there was no contract and no state or federal law prohibiting it. Nevertheless, at the same time our client sent the termination notice, we commenced a declaratory judgment action so that any litigation would be venued here in Minnesota. This proved to be a good strategy, as the Minnesota jurors carefully weighed all of the evidence from 18 witnesses (including four expert witnesses, two for each side) and scores of exhibits, then applied common sense and the law, as provided by the court, to find there was no unlawful action on the part of the manufacturer. Our client is a company that has legal compliance programs in place, and it regularly trains its employees regarding antitrust and termination matters, which also helped. Good documentation was another key to victory.

Quentin Wittrock is a shareholder in the Minneapolis, Minnesota office of the law firm Gray, Plant, Mooty, Mooty & Bennett, P.A., which has one of the largest distribution and franchising practices in the world. Quentin represents manufacturers and other brand owners in their distribution, antitrust, and litigation matters. He works with clients to avoid conflicts through compliance reviews, preparation of distribution documents, and employee training. When disputes cannot be avoided, he helps clients prevail through litigation and arbitration, in which cases the preventative steps taken in advance are most helpful.

ISSUE ANALYSIS

Total Worker Health A growing strategy to improve health and hold down costs By Marsh & McLennan Agency

he issue of wellness is not new to manufacturers, many of whom put a lot of time, money and effort into making sure their workers are safe and healthy. But the results from such initiatives can be mixed. There are challenges with motivation and long-term commitment to changing behaviors. There are issues with an aging workforce, where individuals are challenged by changes to their bodies, including less flexibility, stamina and strength. And increasingly, wellness experts are seeing many other issues linked to wellnessâ&#x20AC;&#x201D;sleep, stress, family concerns, financial problemsâ&#x20AC;&#x201D;the kind of work/life concerns that at best can distract workers and at worst can make them unable to do their jobs. Increasingly a new concept, called Total Worker Health, is being explored as a way to bring together the various strands of employee well-being and help companies treat an employee as a whole person, whose health is affected by a myriad of factors. Creating a strategy for dealing with TWH in a manageable way is not always simple, but it has great potential for creating a healthy workplace and holding down costs. 56

What is Total Worker Health?

TWH is a strategy integrating occupational safety and health protection with health promotion, such as traditional wellness programs, to prevent worker injury and illness to advance health and well-being. In recent years, the wellness angle of the strategy has included mental health and other related issues. The concept was first promoted in National Institute for Occupational Safety and Health (NIOSH) in 2004. The Centers for Disease Control and Prevention, which oversees NIOSH, describes TWH as a new pathway toward a safer and healthier workforce. “Workplace health promotion efforts and occupational safety and health programs have traditionally been separated,” the agency said. “Today’s best companies are recognizing that there is a connection between organizational safety and health, worker health and well-being, and overall costs and productivity. Top employers are moving toward creating new cultures of health and safety using an integrated approach called Total Worker Health.”

Case Study – Lincoln Industries

In Lincoln, Nebraska, a metal-finishing business called Lincoln Industries has taken a TWH approach and targeted a range of issues, including wellness programs; stretching on the job; and financial and emotional support programs. Lincoln Industries’ leadership made a strong commitment to its TWH strategies, and with employee buy-in, the company wellness programs have 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.

Breaking down silos

HR professionals who have studied TWH say that the first step in the strategy is breaking down the traditional silos of HR, safety, and wellness—areas or departments that too often don’t work closely together. By having the leadership in these areas work together, a company can craft a much more comprehensive and successful approach to creating a healthy workplace.

Case Study – USAA

USAA is a financial services company with more than 10 million members and is the leading provider of advice about financial planning, insurance, banking, investments, and financial security to members of the U.S. military and their families. The San Antonio–based company won the C. Everett Koop National Health Award in 2006. To improve its total wellness efforts, the company’s management formed a wellness council that reported to the head of human resources, who 57

oversaw TWH efforts and reported to the chief executive officer. All the initiative’s individual components—which were as diverse as workers’ compensation, disability, safety, corporate communications, corporate real estate, and corporate services worked as a unified group under the wellness council umbrella. As part of its Health Points program, USAA used a health risk appraisal as a personal dashboard for employees. That dashboard comprises an online questionnaire and biometrics (body mass index [BMI], blood pressure, fasting glucose, and lipids measures). Officials reported that the number of employees completing these appraisals and participating in other wellness programs steadily increased. Over time, health risk assessments showed a 28 percent reduction in the number of employees’ total risk factors between 2009 and 2013, as well as in BMI for those in the highest weight groups. And, since 2002, USAA has seen about an 80 percent decrease in long-term disability costs, as well as a decrease in short-term disability.

Why is TWH right for my business?

In the manufacturing field, the changing demographics of the American workforce are keenly felt. Older workers are more susceptible to injury or illness, and chronic health conditions are more likely to impact productivity. By minimizing stress, providing preventive care, and making the worksite a place where workers feel engaged and appreciated, the TWH approach can significantly cut back on the costs that many companies with older workers are seeing. A focus on TWH looks at both possible injuries on the job and the unhealthy effects of lifestyle choices off the clock. And it also recognizes that many jobs encourage sitting or restricted movement for most of the day, contributing to problems such as obesity or musculoskeletal problems. Low activity is not the only unhealthy behavior, of course, and each individual company will have to craft a strategy that best fits its workforce. For example, protecting the hearing of workers may be a priority for some, as the next case shows.

Case Study – 3M, Hutchinson, Minn.

At a 3M manufacturing plant in Hutchinson, Minn., hearing protection is a top priority. The plant’s Hearing Conservation Team promotes “24-Hour Protection” by sharing information and encouraging employees to take ear plugs home to protect their hearing for activities that might involve noisy surroundings. In this case, hunting is a popular pastime, and a number of workers are hunters. The 3M Hutchinson plant’s health and safety personnel recognized the risk to hearing for employees who are recreational shooters and implemented a policy whereby “Combat Arms” earplugs are stocked in the employee store 58

and made available at minimal cost to workers and their family members. The Hutchinson plant employees also receive supplemental information on the unique auditory risks of firearm noise and the performance of hearing protectors specially designed for the shooting sports in their annual Occupational Health and Safety Administration (OSHA) hearing conservation training programs. In addition, awareness campaigns and reminders to workers to protect their own ears and those of their children during shooting activities are distributed each fall and spring when hunting seasons open. As a result of these efforts, the 3M plant won the 2012 “Safe-in-Sound Excellence in Hearing Loss Prevention Award™”, presented annually by the National Hearing Conservation Association. Bringing together wellness, safety, and HR departments to address issues like these is crucial for manufacturing firms. The approach goes beyond things like workstation design, health plan incentives, and wellness programs—these all have an important role, but working together, companies can identify health issues outside of traditional efforts and improve and protect health in new and innovative ways.

Data – The key to effectiveness in TWH

Data has always been a key component of any safety and wellness effort. Good data analytics can show a company where claims have risen, helping them pinpoint what needs to be addressed. Data also helps measure the effectiveness of changes in the workplace, and of wellness efforts over time. A data analysis most often starts with looking at past claims. The past doesn’t always predict the future, but it provides a guide to trends and experience that is essential to establishing the direction a workforce is moving. And ongoing data collection gives a company a firm understanding of which measures and initiatives are working, and which are ineffective. One of the key characteristics of a TWH approach is a careful analysis of data—data that can be shared between departments for a better understanding of health risks and costs. Claims data can be examined for clues to workrelated injury; performance data can help in setting work and safety policies. Worker feedback and action committees can identify problems that lead to employee disengagement or even turnover. Focus groups and surveys are other important data-collection tools. And health screening can give important information on specific problems, thereby helping to pinpoint effective solutions. For example, a Functional Movement Systems (FMS) screening provides measurements of employees as they perform seven different movements on each side of the body to identify the kind of functional limitations and asymmetries that have been shown to lead to increased risk of injury. Employees with poor movement patterns are more susceptible to injury. 59

Once limitations are measured, providing employees with corrective exercises to do throughout the day can reduce this risk.

Case Study – Using FMS screening

A refuse/recycling collection company was experiencing a disproportionate number of workers’ compensation claims among its workforce. To help reduce those claims, Marsh & McLennan Agency implemented FMS screening to identify movements the employees were required to do as part of their jobs. FMS screening identified several key movement patterns where employees’ bodies weren’t able to perform as necessary, so they would compensate by stressing other areas of their bodies. This realization prompted the company to implement stretching exercises to help employees improve their ability to perform job functions while limiting stress to their bodies. As a result, the company’s annualized loss trend lowered from $607,794 to $150,443 in a manner of a few months. Lower amounts of losses will result in lower cost multipliers applied to their insurance premiums.

A change from bottom to top

People familiar with TWH often talk about a cultural change at the companies that are most successful in implementing this wellness strategy. Breaking down silos requires a cultural change, with ongoing support from top management. But it can’t be just a top-down effort. There are high stakes for workers, and the better-educated they are about TWH, the more buy-in a company is likely to have. Consider that workers are already likely to support ergonomics or safety measures. Over time, they are also likely to be more supportive of wellness programs, especially if they see sustained commitment and realize this is not just the flavor of the month. An example from Dartmouth-Hitchcock, an academic medical center in New Hampshire with over 8,000 employees, shows what can happen with top leadership decide to address an issue head-on, using the best practices and data-driven analytics.

Case Study – Dartmouth Hitchcock

As a large health system, covering over 16,000 employees and family members in its health plans, health care costs were almost 10 percent of the medical center’s budget and rising faster than health care inflation rates each year. While collaborative, the employee health and safety departments were in different silos and officials recognized there were opportunities to work together more closely. Another challenge was that the medical center had different locations and clinic sites. The leadership of Dartmouth-Hitchcock decided that it could do better 60

and would aim to have the healthiest workforce possibleâ&#x20AC;&#x201D;a goal that the medical center adopted as the corporate vision, to ensure sustainability and engagement at every level. The center created the Live Well/Work Well (LWWW) program and one core principle was that the health of employees would be facilitated by integration of health protection with health promotion. LWWW developed electronic reporting of injuries (EROI), which assured timely medical care by providing immediate notification to employer stakeholders such as occupational medicine, safety, human resources, and work ability programs. LWWW also identified high-risk work units using aggregate EROI data and assessed their need for health promotion and protection interventions. The work units were evaluated by wellness and performance indicators, including Health Risk Appraisal (HRA) participation, patient satisfaction, culture of health, and nursing quality. In some cases a work unit would meet the programâ&#x20AC;&#x2122;s criteria for an intervention, in which case a Safety Wellness Action Team (SWAT) would be formed to conduct an open-ended safety and socio-environmental assessment of the unit. These teams looked a wide range of issues, including physical hazards, indoor air quality, ergonomics, whole worker health, nutritional environment, and opportunities for physical activity at work.

Bringing it together

TWH is one tool that can help companies build a culture of wellbeing that creates a competitive advantage: healthy and happy workers are more productive, less likely to leave their jobs, and more likely to identify with the company. Although good health benefits and wellness efforts play a large role in employee satisfaction, itâ&#x20AC;&#x2122;s become clear that employees want more from their workplace. Financial services are an area where companies have found enthusiastic response to expanding their offerings. Going beyond the standard 401(k) match, employers can offer programs to assist employees and their families in understanding medical bills, budgeting or financial planning classes, or a stock purchase plan. Employees are also increasingly looking to employers to provide benefits such as universal life, and home and auto insurance. A group policy can be cost effective for employers, and benefits employees in both cost and ease of use through payroll deductions. Likewise the social element of employment can also bring job satisfaction. Employees, especially younger employees, highly value options to socialize together, participate in charity events or fundraisers, or volunteer in the community. TWH is a concept that can help employers get a handle on wellness and safety issues, and do it in a way that uses measurable data, improves morale, and at the same time encourages more teamwork and collaboration. The 61

benefits can help your bottom line, but more importantly, TWH can make workers happier, as well as healthier

ISSUE ANALYSIS

Engage Your Employees Every Day...With a Little Glue and Caffeine By Rick Speckmann, Senior Business Advisor, MRA

oday’s shortage of skilled manufacturing workers requires that employers establish a solid action plan to develop and maintain a highly productive workforce. There’s no debating that worker shortage is prevalent in Minnesota. In fact, according to Toby Madden, Regional Economist at the Federal Reserve Bank of Minneapolis, the state’s unemployment rate will continue to drop through 2015, with a prediction of as low as 3.3 percent year-end. Thus, giving you more reason to engage your top performers now! Every day successful manufacturers monitor product supply and demand with an eagle eye, continually scrutinizing a multitude of factors and taking action to maintain optimal production. Whatever the situation, business leaders keep their antennae up to ensure a balance between supply and demand. For manufacturers, it’s the same balancing act when evaluating the skill level of their workforce, especially in such a competitive environment where talent supply is low and demand for certain skills is high. A proven approach to retaining a highly productive workforce involves 63

engaging and energizing employees each and every day. The keys to doing this involve strategies that make employees want to stay (a little “glue”) and infusing activities that will activate their motivation levels (a little “caffeine”).

Let’s Talk Glue

Glue is the compelling ingredients that bond employees to the company for the long-term. It’s what keeps employees securely fastened in their seats when the economic market is uncertain. Glue represents the enduring elements that form loyalty, commitment and trust. We know that loyalty, commitment, and trust form the type of job fulfillment that is the foundation of engagement. Top-performing employees I’ve met define their jobs in terms of personal fulfillment. Beyond a competitive salary, with benefits and perks, the glue that binds employees to their jobs includes activities that build upon an employee’s sense of fulfillment: new tasks, expanding responsibilities, flexible hours, learning and classroom training, involvement with planning, freedom to make decisions, support and encouragement from management or a challenging project.

Let’s Talk Caffeine

Caffeine is the periodic infusion of activities that activate energy bursts, keeping employees looking forward to what’s coming next. Caffeine represents the exciting stimulants that employers can use to motivate employees, such as: cash, a stipend, extra paid days off, food, discounts, or some other tangible reward. Rewards work well when applied to results that are measureable and should be mixed up over time so employees don’t take them for granted.

Creating Synergy

Combining glue and caffeine may sound a bit like mixing oil and water, but that mixture actually creates great synergy. Caffeine gets employees through a challenging fast-growth company cycle while the glue is curing and securing long-term commitment. And often, what may initially serve as a dose of caffeine effectively increases the glue that strengthens longterm retention.

The Onboarding Process

Recruiting is the earliest stage of onboarding that sets the platform for strong retention. Much of your recruiting to hiring dialog should be a process of defining mutual “fit” of the person to the company and the company to the person. So in reality, that means retaining new employees begins before they are even hired and continues for months into 64

employment. In the first six to nine months, both the company and the new employee put considerable effort in getting to know each other. Day-to-day questions comprise the bulk of activity but both parties are equally committed to getting aligned with each other. According to a study by the Aberdeen Group, over 85% of new employees aren’t fully committed to their new job until the first six months as they get acclimated to their new surroundings. In addition, losing an employee within the first year of employment is estimated to cost at least three times his or her salary, according to a Wynhurst Group report. Acclimation and commitment can be accelerated through a formal onboarding process. An onboarding program provides the big picture of the organization to help the new employee understand how his or her work fits in with and contributes to short- and long-term goals of the organization. While formal onboarding applies a substantial layer of retention glue, adding a mentor into the mix--someone who regularly meets with the new hire either on a formal or informal basis--provides a shot of caffeine. A mentor helps the new employee feel welcome in the new surroundings, reducing the new hire’s tentativeness and bolstering the employee’s sense of belonging. A well-planned and executed onboarding process can not only retain employees, but foster employee engagement and accelerate productivity.

Communication Styles

One step often overlooked during onboarding is determining and understanding communication styles. When thrown together for the first time, a supervisor, new hire, and co-workers will try to “figure each other out.” Misunderstood communication may result in hurt feelings and confusion. Tools such as the DiSC or Myers-Briggs Type Indicator® (MBTI®) profiles provide a comprehensive, low-risk method to uncover preferred styles of communication. If the new hire, for example, understands from the start what his or her style is and how it matches with the supervisor’s style, communication flows more successfully. Additionally, when all employees are aware of individual styles, you can expect enhanced communication, cooperation, and collaboration. This encourages employees to make allowances for co-worker personality style elements that might otherwise be construed as seeming difficult or challenging. A firm basis of an employee engagement program and the core of supercharged teams provide many “aha” moments. A high percentage of a manager’s responsibility is learning how to adjust to the styles of his or her reports. In his book Emotional Intelligence, Daniel Goleman capsulizes the concept well, explaining that managers must understand how their emotions help or hinder them in interactions 65

with employees. They need to know how their employees perceive them, and adjust accordingly. If employees have a positive rapport with their managers, they are willing to give more to the organization, which epitomizes the whole definition of engagement. We have found that Instruments like DiSC, MBTI®, and the Profiles XT are amazingly accurate, serving as both retention glue and retention caffeine. Boosting an employee’s satisfaction level and reducing frustration, along with eliminating that knot-in-the-stomach feeling that can easily occur when an organization doesn’t acknowledge personality differences, will help employees learn how to deal with communication style variations. Investing in these tools has a profound effect on employee engagement and retention.

The Feedback Loop

The next logical ingredient vital to continual engagement is ongoing, open dialog between the employee and supervisor, known as the feedback loop. When a manager makes a conscious effort to develop continuous dialog by soliciting opinions, discussing goals, and keeping communication comfortable and frequent, it builds open relationships with employees. This is a far cry from the old-school managerial approach, “I’ll tell you what I want and if I want your opinion, I’ll ask for it!” Feedback motivates people to perform well consistently. Frequent, easy-going contact and open communication removes the intimidation factor. If there’s an ongoing feedback loop and the employee begins to “stray,” the conversation can be therapeutic rather than confrontational, and that type of caring approach can cement years of workplace loyalty. Managers can spread another layer of retention glue by conducting 15-minute meetings with each employee every three months, looking back at the past quarter and ahead at the next. This “mini-review” offers an ideal opportunity to provide feedback. When managers communicate messages such as, “I noticed you picked up quickly on learning this new skill,” it supplies a boost of caffeine for the employee. Ongoing dialog strengthens relationships and removes intimidation, so even an employee is much less likely to be defensive or shut down if they receive a comment such as, “I’ve noticed that the team is a bit off the mark when it comes to quality… tell me what you think might be causing that.” That’s because you’ve been careful to lay retention glue all through the quarter. Think of the 15-minute quarterly meetings as a “stay interview.” Stay interviews are one-on-one discussions with employees and their managers where managers learn what is going well and what could be improved. Stay interviews keep the pulse of top performers, identifying concerns and committing to act upon concerns and suggestions to make positive changes. According to recent research at the Institute for Corporate 66

Productivity, stay interviews were identified as a major talent management practice that contributes to both higher levels of engagement and higher market performance. Also, identifying your top performers’ current interests and preferences during stay interviews could uncover unexpected ways to further increase engagement. You may learn, for example, that a veteran salesperson looking for new ways to make contacts would be refreshed and excited (caffeine) by occasional workdays helping with community service projects (glue), which will gain positive public relations exposure for your company at the same time. Glue + caffeine = engagement.

Genuine Performance Reviews

If you’re like most managers, you’d rather undergo a root canal than conduct annual performance reviews. Annual reviews can lack authentic engagement, almost as if two unfamiliar people are in the room. What should be an experience that celebrates hard work and recognition of performance oftentimes comes off as being rather stiff and formal. It’s possible to shift the dreaded annual reviews to an extremely positive experience if you’ve conscientiously applied the retention glue of ongoing dialog and three 15-minute quarterly meetings (the fourth quarter is the Annual Review meeting). In this manner, feedback given during annual reviews should not be a surprise. For a top performer, nothing in the annual review should feel out of order or confrontational. It’s all about looking forward to the next set of goals and achievements. Quarterly 15-minute meetings and annual performance reviews are ideal occasions to chart development pathways and identify training programs to enhance skills. If you have a competent, solid worker who has performed to expectations, you absolutely want to keep that employee. In the annual review, ask the employee how he or she feels the year went. Call attention to accomplishments, challenges, and learning. Acknowledge performance and behaviors. By doing this, you are setting the atmosphere of “rerecruiting” that employee for continued employment. When you shift discussions to the upcoming year, be transparent about anticipated or planned changes in the company as well as goals and expectations of their job. Ask employees about what’s important for the future and whether expectations, aspirations, or needs have changed in the last year. Sum up the alignment, and emphatically “re-hire” the person. The employee will likely leave the annual review meeting feeling great about the upcoming year and recommitted to the company– thus enjoying an injection of caffeine and another layer of glue.

The Pulse of the Group

In his book Management Challenges for the 21st Century, Peter Drucker 67

commented that the means of production is no longer solely found in machines and the buying of people’s backs and hands. Rather, today the means of production is more often found in people’s brains and hearts— and the concept of engagement speaks to people’s brains and hearts. Year after year, studies find that around 67% of employees are not fully engaged. When employees are anything less than fully engaged, business growth opportunities are lost and revenue and profit is essentially left on the table. Employees have more capacity than their organizations are tapping into. Essentially, it’s like having a race car that can go 200 mph, but only driving it at 150 mph. An employee engagement survey can uncover issues that a great feedback loop may not reveal. Just because a competent employee continues to achieve goals and objectives doesn’t mean the employee is happy. Regardless of how they feel, competent employees have high integrity and are tenacious enough to honor their goal commitments. But, if they are simply going through the motions, the next motion might be an unannounced job search. The science of measuring the level of employee engagement has progressed, resulting in engagement surveys that provide a goldmine of information to help move the percent of employees who are partially engaged into the fully engaged group. Bonni Yordi, Ph.D., Director of Employee Engagement Surveys at MRA explains, “Today’s sciencebased surveys can measure everything from numerous segments from departments, to alignment with company mission and goals, to manager effectiveness. Because the concerns in one area of the organization can be different from those in another, effective surveys can be designed to report on the subgroups that are of interest to management. Analysis can provide a picture of how engaged, partially engaged, and disengaged employees view different aspects of the workplace. This type of data allows management to prioritize its response to survey data, providing the greatest opportunity to retain the most loyal, productive employees.” Note that I am specifically separating “satisfaction” from “engagement” survey types. Satisfied employees can change with the wind in their acceptance of work conditions. Engaged employees are glued much tighter to the organization because of their passion, buy-in, and personal alignment with the company. When an organization communicates its survey results to employees and takes steps to improve employee engagement based on those results, it applies another layer of retention glue--a hallmark of an organization that values its employees. Because high engagement and high retention go hand-in-hand, employers often find an employee engagement survey an exciting journey that pays off highly in an invigorating, thriving workplace.

Talent Development

While compensation is assumed to be at the top of an employee’s list of reasons to remain with an employer, in the U.S. it has long been reported that other factors, such as opportunities for training and career development, top the list. As a country that’s both built on and focused on growth, learning is a deeply embedded cultural factor. Most people like to learn, and employees view training and development opportunities as benefits. While training is often focused on job-specific skills, soft skill development continues to rise in importance. Dubbed “talent development” today, training options include a wide range of programs carefully designed to help employees improve communication, leadership, and teamwork skills. Both off-site and on-site programs are available, enabling organizations to select the most appropriate time and place. Sometimes entire teams participate together in the same program, building team skill and spirit. The effective manager actively assists in identifying viable career paths for employees. The career path could simply include being more effective in the existing role, or could be a pathway that includes an eventual move to a different department, or mentoring newer employees. Providing continuous talent development opportunities is a “super” glue for retention, cementing your employees’ competence and confidence for years to come.

Conclusion

With the very real challenge of skilled labor shortages on the horizon, business leaders need to recognize the critical role of employee engagement and retention. According to Deloitte’s recent Global Human Capital Trends 2015: Leading in the New World of Work report, 87% of HR and business leaders say lack of employee engagement is a top concern; however, over half also indicate they don’t have strategies in place to improve engagement. Engaged employees bring a heightened sense of commitment and of personal drive. They are deeply involved in their work, are willing to give their discretionary effort, and are loyal to their employer. Applying the focused efforts I’ve highlighted in this article will make a huge difference in an organization’s level of success toward improved employee engagement. Numerous large-scale studies show that greater engagement leads to increased customer satisfaction, productivity rates, employee retention, and revenue growth. Engaging and energizing employees is a continuous and daily process. When you apply the same time, energy, critical thinking, and resources to employee retention as you do to production, quality, expense ratios, and sales results, the synergy of glue and caffeine will yield measurable 69

positive retention results.

About Rick Speckmann, Senior Business Advisor

High energy, an optimistic outlook, and an insatiable appetite for “raising the bar” of performance are among Rick’s strongest traits. With 40 years of business management/leadership/ownership experience and a diverse background in nine different industries, Rick brings a broad spectrum of skills to the MRA team. Past experiences in five companies as a founder, partner, and manager honed his skills as a decisive leader, strategist, marketer, and developer of talent. Rick’s leadership responsibilities include roundtable development, outplacement services, strategic planning facilitation, and executive coaching.

About MRA

Founded in 1901, MRA is a not-for-profit association for employers that serves more than 4,000 organizations throughout the Midwest, covering more than 800,000 employees. As one of the largest employer associations in the nation, MRA helps its member organizations thrive by creating powerful teams and safe, successful workplaces. MRA conducts more than 2,000 learning events each year. MRA is headquartered in Waukesha, Wis., and has regional offices in Palatine, Ill.; Moline, Ill.; and Plymouth, Minn.

ISSUE ANALYSIS

Build Business Results that Matter through Marketing Ted Risdall, CEO and President Risdall Marketing Group

usiness growth is a top goal of any manufacturer. In the 2015 State of Manufacturing survey, Minnesota manufacturers shared that new products, new customers and leadership development will drive this growth for their businesses. But with changes in technology and buying habits, it can be hard to reach quality prospects with news about your products and services, and why they need what you specifically offer. Global B2B research and advisory firm SiriusDecisions found that the average sales cycle increased by 24 percent in 2014 over 20121. Two strategies can be implied from these findings. First, companies need to invest more time and effort into courting customers throughout the sales funnel. Second, companies need to market their products and services to a wider base of decision makers. Most organizations focus on the bottom of the sales funnel to trigger sales. These ripe-to-convert customers are attractive because they already know your company and have shown interest in your products. They are the go-to market for sales staff when a new product or service is released. This approach always hits a plateau, usually based on market saturation 71

and sales staff limitations. To achieve business growth results that matter, it’s critical to find new audiences. This means focusing on the middle and top of the sales funnel to pull in new interest for your company. This idea to pull in new customers through meaningful content is typically called inbound marketing, and it solves fundamental lead generation barriers – lack of resources in staffing, budgeting or time2. Inbound marketing strategies and tactics include compelling websites, public relations, digital marketing and content marketing. They sell your company outside office hours and sales calls, and support your sales reps’ work. It’s even more important when you consider that before contacting a vendor, 56 percent of engineers are in the second or third stage of the buying cycle and relying on digital resources for information3. Marketing supports the business growth drivers identified in the 2015 State of Manufacturing survey because its purpose is to share your products and services with your target audiences, whether those are established customers or new leads. When all marketing strategies and tactics work together, alongside your sales team, they achieve the main result that matters – growth for your business.

Marketing as your company’s growth engine

Marketing can be a growth engine for manufacturers, but getting started can be perceived to be daunting. By asking three overarching questions, companies can start gathering information for a marketing plan. 1. 2. 3.

What is our core purpose? Where do we want to go? How do we get there?

Core purpose is often defined by existing company mission, vision and values, and defines how you do business every day. Future goals are the target goals and objectives you want to hit as a company. These may be tied 72

to internal initiatives such as increasing employee engagement or offering a new product, or linked to external goals such as growing your customer base or gaining leadership in your industry. Core purpose and future goals are two ends of a business spectrum, and serve as a measuring stick for progress. Without first defining these, there’s little chance of determining long-term results that matter. The plan to move from one end of that business spectrum to the other answers the question “How do we get there?” It is one of the most difficult but critical questions you can ask as a company. To answer that question means digging into your company’s offerings, understanding current and desired customer audiences, and defining the competitive landscape and your differentiators to find what messages you can own in your market. Laying out this strategic network of information takes time, persistence and patience, but the results can be amazingly insightful. Learning what makes you different, paired against your future goals, helps lay the groundwork for marketing and communications strategies for your business. It charts a path to growth.

Lead generation with direct-response marketing

Lead generation is one of the top ways manufacturers drive sales growth. Because more leads typically need to be generated to make one sale, sharing your company’s message with the right people is all the more important. One customer relationship management (CRM) automation company found that its B2B customers, on average, needed 128 leads to close one deal4. Your lead-to-conversion rate is unique to your business. Once you know these numbers, there are a variety of short-term strategies and tactics that can deliver a lead generation response. These strategies work best in conjunction with longer-term strategies because while they feed lead generation by raising awareness quickly, the return on investment plateaus quickly as well. Direct-response tactics, digital marketing, website and search engine 73

optimization (SEO) and trade shows specifically fall into this category. •

Direct-response tactics include email campaigns, including email blasts, direct mail pieces and press releases that push awareness around a new product. The important part of direct-response efforts are strong calls-to-action that spur the consumer to act a certain way, like clicking to learn more or filling out a contact form. These ideally deliver information that’s quick to read and engaging, for a short-term awareness boost and lead generation.

•

Digital marketing in the quick-response context encompasses paid search tactics, including online pay-per-click and cost-per-click ads. By placing online ads linked to search terms, your company can show up online when specific keywords are searched. On Google, these ads show at the top of the page, and can generate a large number of clicks in a short period of time.

•

Websites are one of the best direct-response tools a company has. It’s a digital storefront, where customers can window shop or walk in and find exactly what they need. Landing pages that link back to a main site are a best practice for capturing leads brought in via marketing.

•

SEO is the process of making your online content fit better with how people search the Internet. In 2013, GlobalSpec (now IHS Engineering360), found that 84% of industrial professionals use the Internet to find components, equipment and services. By optimizing your website content, you can see almost immediate gains in web traffic to your site. This is a short-term process that requires ongoing management as search engine algorithms change and can affect search results.

•

Product-based public relations is another short-term tactic designed to trigger an audience response. A press release draws attention to a new product or service, and can direct customers to more information or where to buy. Sharing news with trade media can generate directresponse leads to stories as well.

•

Trade shows are another area that can have big lead generation rewards. While planning a trade show presence can take months, this is a short-term tactic because all the awareness action is centered within a few-day period. Leads will generally peak during the show, with a sharp decline after the show closes; however, leads may have a higher conversion ratio because the audience is so targeted. Adding 74

public relations outreach to media in attendance can extend the reach of trade show efforts. Another tactic thatâ&#x20AC;&#x2122;s quickly gained ground in recent years, especially among small and midsize companies, is marketing automation. This tactic is the marriage of smart software and ongoing outreach, automated through digital campaigns, and has given rise to marketing automation powerhouses like HubSpot, Marketo and Salesforce. Marketing automation is an interesting strategy/tactic because it is a series of short-term awareness boosters compiled as one larger, longterm strategy. Email drip campaigns are a great example of marketing automation. These campaigns automatically deliver a series of emails on a schedule, with the goal to drive specific actions, including lead generation. The first email may be delivered when someone signs up to download a white paper or sales brochure, with a second email a week later, and a third two weeks after the second. Typically, marketing automation and other short-term tactics outlined work best as part of an integrated outreach or marketing campaign rather than the sole means to share information about your company. This is because their ROI plateaus quickly. Companies who have hit that plateau should consider expanding their marketing mix.

Reaching new audiences through more effective marketing

For a longer return on investment, manufacturers need to consider marketing activities beyond quick, one-time tactics. More sustained and substantial communications broaden your reach and generate longer-term customer relationships. These marketing strategies speak to audiences higher up the sales funnel by offering engaging content to those already interested in your company, as a means to move them from quality lead to customer. These efforts find potential customers who are searching for solutions like yours, whether they know your business yet or not. Three strategies that support this engagement are ongoing public relations, content marketing and thought leadership. Ongoing public relations involves searching for and taking advantage of opportunities to promote your company, and works well as one part of a content strategy. Content marketing has been buzzed about for the past several years, defined as how content is shared and repurposed for different channels and audiences. Thought leadership is the method of growing expertise and mindshare on a topic or industry, and is an ideal way to promote and develop not only your companyâ&#x20AC;&#x2122;s leaders and management, but your companyâ&#x20AC;&#x2122;s reputation as well.

Ongoing public relations Ongoing public relations is about sharing your stories and experts with your target audience. It builds top-of-mind awareness and visibility with those your business needs most to grow: current and potential customers. Smart public relations activities are proactive in nature. Instead of creating and sharing a press release in reaction to a new product, this strategy forecasts opportunities to share your products and expertise. It could also include developing award entries and abstracts for speaking opportunities, and creating a yearlong promotion strategy to share case studies, milestones and expertise. Because at its heart public relations build relationships and promotes your company’s innovation and expertise through content, it has one of the highest ROIs of the marketing mix. It also increases the effectiveness of other sales efforts by supporting overall business goals. Content marketing The idea of content marketing is about as old as marketing itself, even while the term is relatively new. It is the answer to this question: How can I promote my company’s expertise using new and existing content? A critical factor to the growth of “content marketing” as a defined term has been the role that digital marketing and online promotion play in sharing and repurposing content. Content marketing validates your expertise, with both existing customers and others searching for your solutions. It’s also costeffective, generating three times the leads of traditional outbound marketing, while costing 62 percent less5. Here is an example of a typical situation where content marketing works: Your company has released a new product, and you want to promote it. Your public relations team interviews experts at the company, reviews product specs and puts together a press release. But this is a big product, and you want to share the news broadly – but smartly – with your audience. You want to go beyond a release to share with trade publications. You want to market this content. The first step is to take inventory of what assets you have. From a typical content standpoint, you have a press release and product 76

photo. But you also have the experts on staff who helped develop the product, and the product itself. The next step is to determine what channels you have to share the news. Your company has an online newsroom, a blog, and Facebook and Twitter profiles, plus relationships with trade media to distribute the release. You’ll want to use all these to spread the news to your audiences. Now it’s time to develop your content marketing plan. The press release and photo will be posted to the newsroom, and a summary will go to the blog that links back to the release. Similarly, posts linking to the release will be shared on social media channels, and the PR team will send to their media contacts. But what else can you do? The next week, consider a blog with a Q&A interview of the engineer who developed the product. You could film the interview to make a short video about the design process to include as part of the blog, and also share the clip on social channels. A quote pulled from the interview is another great social post, to tease the full blog post. And the ideas don’t have to end there. By thinking about content a little differently, it’s easy to turn one press release or product announcement into a larger campaign to drive more interest. Content marketing has an additional benefit of boosting the effectiveness of your other marketing strategies because by sharing information, you’re reaching more potential customers. Thought leadership Thought leadership campaigns are one of the best ways to gain longer-term attention and awareness for your company. It’s an ideal content strategy to gain ground as an expert on a topic or cement your leadership in an area. Viewing the three questions to develop a marketing plan with a thought leadership lens is a good start to a campaign. What expertise do you have (where are you), and what expertise do you want to be known for (where do you want to go)? Auditing competitors’ messages and what’s hot in the industry provides insight into opportunities for your company’s leaders. After this reconnaissance, you’ll want to map a strategy to align and prioritize topics, expertise and resources your company can own. For example, if you want to be the go-to expert about smart distribution, think about possible topics to address within that category, who the right 77

company spokesperson is, and where to share your expertise, including: • • • • •

Reporting on trends/proprietary data Developing white papers that advance knowledge on your chosen issue Writing bylined articles and commentaries Recording webinars, podcasts or videos with company Speaking at professional organizations and trade shows, or hosting an industry event

A natural starting point with thought leadership is executive visibility because your president, CEO and C-suite leaders are already known for their expertise. Leaders have a built-in platform as directors of a company, and can begin to use that expertise and position to develop a unique voice among competitors and grow a company’s reputation. The most important part to understand about thought leadership is that you’re sharing expertise freely and openly with others. This is not giving away proprietary information, but rather a way to boost your reputation by sharing a bit of what you know. Thought leadership pieces make excellent base material for content marketing campaigns, to raise awareness of expertise in your industry and potential customer base.

Creating a halo effect by building your brand

The longest-term returns on marketing investment also take the most time to create and enact. These activities generate the deepest relationships between a customer, sales rep and company by building brand associations for your company. Brand-building strategies include corporate social responsibility, brand advertising and cause marketing. An excellent starting point for these strategies is to earn recognition for good work you’re already doing. Maybe your company volunteers once a year with Habitat for Humanity, or implemented a sustainability initiative that reduces carbon emissions. You’ll find that these initiatives build your company’s reputation both externally and internally. They communicate your values with new and potential customers, as well as with current and future employees. Building associations can also focus on business values rather than deeds. As a leader in a particular technology, your company might be known as an innovator among its peers. To help this message reach a broader audience, you could start an awards program to recognize innovation from other sources, such as startups and entrepreneurs. These strategic activities have the longest-lasting impact with your audience, because they build on your existing expertise.

Every campaign is measurable

Renowned late 19th century department store mogul John Wanamaker is credited with saying, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” Even today, 49 percent of B2B marketers cite measuring content effectiveness as their biggest content marketing challenge6. But everything is measurable. New campaign tracking and reporting tools make it possible to measure what works and doesn’t, and to find opportunities to be more effective. From these tools, you can create reports specifically for your CEO and leadership team to show how marketing dollars are spent and, most importantly, how those dollars work for your company. This eight-step plan highlights best practices in measurement, to effectively learn how to best meet your goals and grow your business. This plan can be used to measure goals and results across marketing strategies and efforts, from websites to digital marketing and advertising to public relations. By analyzing outcomes, you learn where successes and challenges are, and examine how your marketing dollars are being spent effectively. Eight steps to measuring results that matter 1. Review and/or set goals. These goals will drive your strategies and tactics. Without goals, there are no means to measure results. 2. Review current measurement situation. Understand how your company currently measures results. Identify any measurement gaps where information is missing. 3. Benchmark current key performance indicators (KPIs). KPIs are your goals in measurement, such as leads, web traffic, etc. Take a baseline reading before implementing a marketing strategy to compare to results after the strategy is implemented. 4. Develop marketing plan to implement. Based on research from steps 1-3, develop a plan of strategies and tactics to achieve goals. Measurement can begin once the plan is implemented. 5. Determine new measurement KPIs and objectives. Based on your new goals and marketing tactics, set up your measurement KPIs. Take into account specific time periods (for example, 30 leads each month). 6. Find appropriate measurement tools, and implement. The right tools will depend on which KPIs you want to measure, as well as 79

your budget. 7. Create a reporting template and timeline(s). A template creates a level of comfort in reporting results. Determine time periods for reporting and delivering reports (weekly, monthly, etc.). 8. Measure, analyze and report results. Gather results from each measurement time period, and analyze the findings. Include recommendations for how to improve results or processes within each report, to better reach goals defined in step 1.

Building business results that matter

Marketing is one of the best business growth engines for manufacturers, and the best success comes from an integrated plan that uses both shortand long-term strategies. • Generate leads through direct-response tactics that trigger a reaction with your customers. • Pull in new audiences with content marketing, public relations or thought leadership, to reach higher levels of engagement for your company. • Build your brand with strategies like social responsibility promotion and brand associations to open new doors. • Measure outcomes, adjust to build on successes and continuously improve your marketing plan. By including strategic marketing in overall business planning and measuring outcomes, manufacturers can find results that matter for their business, and continue to grow.

1 SiriusDecisions, “Sales Enablement Market and Trends Survey Revealed,” 2014, <http://www.slideshare.net/SAVO_Group/07-siriusdecisions-sales-enablement-market-and-trends-survey-revealedsiriusdecisions> 2 B2B Technology Marketing Community, “B2B Lead Generation Marketing Trends,” 2013, <http://www.slideshare.net/hschulze/b2-b-leadgeneration-report-2013>. 3 IHS Engineering 360, “Digital Media Use in the Industrial Sector,” 2013, <http://www.globalspec.com/advertising/trends-wp/ WP_DigitalMediaUseintheIndustrialSector>.

4 Implisit, “B2B Sales Benchmarks: Lead to Opportunity Conversion Rate – 13%; Lead to Deal – 6%,” Nov. 24, 2014, <https://www.implisit. com/blog/b2b-sales-benchmarks/>. 5 Demand Metric, “Content Marketing Infographic,” <http:// www.demandmetric.com/content/content-marketing-infographic>. 6 SocialMediaB2B.com, “20 Most Important Stats from the 2015 Content Marketing Report,” 2014, <http://socialmediab2b.com/2014/10/ b2b-content-marketing-report-statistics-2015/>.

2015 The State of ManufacturingÂŽ

Focus Groups

Feb 27

Custom Products, Litchfield. Sponsors: Litchfield Chamber of Commerce, Seal Tech Industries, Meeker County Economic Development, Custom Products of Litchfield, Inc.

March 9

Riverland Community College, Albert Lea. Sponsors: Albert Lea-Freeborn County Chamber of Commerce, Interstate Packaging Corporation, Lou-Rich, Inc., Riverland Community College

March 11

Saint Paul College, St. Paul. Sponsor: Saint Paul College: A Community & Technical College

March 11

Minnesota Precision Manufacturers Association, Minneapolis. Sponsors: St. Paul Port Authority, Minnesota Precision Manufacturers Association

March 13

MRA, Plymouth. Sponsor: MRA

March 13

Elk River City Hall, Elk River. Sponsor: City of Elk River Economic Development Authority

March 17

South Central College, Mankato. Sponsor: South Central College

March 17

Duffyâ&#x20AC;&#x2122;s Restaurant, Redwood Falls. Sponsors: Redwood Area Development Corporation, Southwest Initiative Foundation

March 18

Surly Brewing Company, Minneapolis. Sponsor: Baker Tilly

March 19

Gray Plant Mooty, St. Cloud. Sponsor: Gray Plant Mooty

March 19

Ridgewater College, Willmar. Sponsor: Ridgewater College

March 20

Alexandria Technical & Community College, Alexandria. Sponsors: Alexandria Technical & Community College, Alexandria Area Economic Development Association

FOCUS GROUPS

Litchfield February 27

Custom Products of Litchfield, Inc

Let’s start by talking about the economy. What do you expect? Expansion? Uncertainty? Recession? • I think there are two answers to that. One is, if you’re asking us to be an economist and look at the overall economy, I’m declining. I’m not qualified. But as we look at our business we’re in the middle of a growth spurt and we will see steady sales ramping up for the rest of the year. Because of the economy or is it because of things you’re doing? • We manufacture large CNC robotic systems. We’re seeing a number of those machines being sent to Brazil, India, Australia, Canada, Mexico, more than we’re seeing them coming into the United States, which is giving me a shaky feeling that a lot of the smaller manufacturers that use these big machines, are leaving us. Is your sense of that because of a better global economy? • We have two people looking at machines right now and one’s in Monterey, Mexico, and the other we put there is in Juarez. They’re U.S. companies, but they’re buying the machines and putting them over the border. Sponsors: Litchfield Chamber of Commerce, Seal Tech Industries, Meeker County Economic Development, Custom Products of Litchfield, Inc. 83

• That’s a trend we all see going through the labor market, transferring out of the U.S. I just shut down a plant in South Dakota. We’ll be moving more products from our company to Mexico and some of it to our plant in China. We’re not purchasing capital for inside the United States. Do you sense that it’s driven by an overall flatness of our economy here or improved economy elsewhere? • It’s driving toward international competitiveness and one of the big things that we struggle with here in the United States is the cost of labor, and the cost of medical. Anyone see recession on the radar? • We just had a record year of lots of growth, but other people in our industry were flat, or slightly down from last year. Our industry is really tied to consumer electronics and I think there’s some feeling of concern there. Also, if you look at the Purchasing Managers’ Index, that’s been up for a long time, it usually drops off after that. • We supply to a mining group at large. Caterpillar is a big customer, L&M radiator up in Hibbing, big customer, John Deere, that big equipment, all soft. I know we’ve cut out a couple million dollars of business because of it. • When you start looking at how many companies are springing up between the Twin Cities to Rochester in manufacturing it’s actually pretty impressive, but it’s driven by the medical industry. So, when you regionalize or compartmentalize these things it’s hard to see how the balance of the state looks exactly, but there are changing economies, is what I would say. One struggle that seems to be everywhere is the labor force. That’s seems to be whether it’s in the southwest region of the United States, whether it’s the Midwest, all over labor force is becoming an issue -- to have enough bodies that are able to function in their manufacturing plant, to be able to produce the products they want. We’ve talked about the economy. Now, let’s talk about your businesses. Growth? • We’re in cheese and dairy products and last year we had a record year as well. My prices have come down so we’re kind of in a flat cycle right now, but we are looking for additional roles. We just went into expansion here in the last couple of years. There’s enough milk in Minnesota for more growth, but the growth of manufacturers is limited. That milk is going somewhere to be manufactured. Infrastructure is the key. How many of you are looking at 10 percent growth this year? 84

• Right at 10%. • We’re at about 10.4%. • We’re not going to grow this year. That’s because the last two years we focused on taking costs out of the U.S. and straightening the bottom line. The growth just hasn’t been there because we’re just focused on turning the company. What about profitability? • One of the problems there is you have to build in efficiencies just to cover some of the other things you can’t control, like health insurance costs. You have to build in a ton of efficiencies to make up for those hits that you’re taking that you can’t control. That’s going to be a stabilized or even—if you don’t do those efficiencies you’re going to take a hit in the bottom line. • Again, it’s getting better, but through other means of making us more efficient in transferring products out. So, as a company it’s getting better, but as a site it’s a balance. • Do we make our employees more efficient so we can compete internationally? Everybody has to be more efficient, everybody has to buy into that. It’s not just through automation. Every one of your workers needs to be thinking, how do I become leaner and more efficient? That’s what makes us competitive internationally. There’s a much quicker way to get that -- and that’s by outsourcing your business internationally. You don’t have to work at all that efficiency, which is a constant. You’ve got to work for better efficiency, and by just taking out and you go from a $17-an-hour job to a $2-an-hour job, that’s quick. That’s quick and it’s very profitable. Are you still feeling the effects of 2008? • There’s some residual there. The machines that we manufacture are automated systems basically designed to replace manual labor and we’ve discovered over the last three or four years that people aren’t going to lay someone off by this machine, but they’ll buy this machine rather than hire people. The other scary part is they buy the machine and they’re not putting it in the United States. But there’s a residual effect that as it grows back from 2008, its growing back in a different rate, less dependent upon manual labor here, and more dependent upon automation. • I think there’s more automation and lower labor around the country as well. • Exactly. There’re fewer jobs and those jobs that there are, aren’t here. That goes back to the workforce too. Try to find someone to do that labor. • That’s what we’re struggling with. We are unable to find employees to do our manual labor. We don’t have the people. • With skilled, yes. And our workforce is in Minnesota and we do have 85

a plant in Ohio as well, but they’re struggling with the same issue. In Minnesota we just can’t—we’ve advertised at colleges, we’ve advertised on Minnesota Works on the Internet, and we just can’t seem to get young employees into our work force. • I don’t think we’ve done enough to transition our experienced older workforce. • I don’t know that we have. Our workforce is pretty old. We need to think smarter, not work harder. We are doing some equipment changes in order for that to work, but we’ve had an ad in the paper for about a month. I have five applicants and none of them are really that local. They’re having to drive quite a ways. Do they bring sufficient skill to the job even though they’re far away? • No. The majority of them do not. • There’s a lot of on-the-job training. You’ve got to bring them in and train them, and hope they stay. • I think you’re also seeing a work ethic change as well. The folks you bring in not only have challenges of the skill set, you have challenges that some of them just don’t want to be there. • We’ve been trying to get a second shift started, but we can’t do it here. Now, we’ll actually start one on Monday in our Ohio facility, but that’s just taking from our first shift to fund our second shift, and now we have to replace all those people on the first shift and train them, and we’re having a hard time doing that as well. Let’s talk about that. Is the biggest workforce challenge in skills or attitudes? • I don’t see either improving. • I would agree. • And I’ve been with the company for 26 years. • It’s a whole generation. • Yes. • That’s the problem. • The younger kids do not want to work. • I think they want a job, but they don’t have the ethics to do it. They don’t want to work. We’re in welding and machining. To go ahead and find people to fill the jobs we’re struggling all the time with that. You get people walking in the door applying for work, but they want a job, they don’t want to work, plain and simple. • I think for our case, we’re 24 hours a day and I think life style plays into that too for some people, with working spouses, maybe they’re working shifts and they just don’t line up. Lifestyle plays a part. • We’re finding a little bit better success with the exception that there is 86

fair amount of fallout, but I think we are still finding some pretty young people who buy in and are engaged, and are hard workers, and have great ideas. Is it luck or are you doing something different to try to attract them? • We are doing some things differently in our approach in how we’re training them, and how we’re presenting opportunities. I think the younger generation is really motivated more by an opportunity to advance in the future. And if you work with them and point out how their behaviors affect that future opportunity I think that helps them understand, that, “Yes, attendance and what I do when I’m here matters.” But some of them, they don’t get it. You move on. • Part of it, I think, goes back to the educational system in which kids are told you have to go to college to get a good job. We’ve been pushing, pushing college, pushing college prep, so these kids say, “I’m supposed to get a job and sit behind a desk and make big money. I shouldn’t really have to work that hard for that.” I think that might be at the start of a changing run as we look at more STEM systems coming into the schools and people are realizing you can’t graduate with a $60,000 debt from college and there’s no work for you. But I think that’s not going to turn around overnight. • Yes, but on the plus side of that is it’s really tough for young adults coming in, raising kids, making $15 an hour, thinking they’re going to get ahead in life. • There’s a wall you hit there. I mean it is. It’s tough. And then the cash cow, I look at—well, we hit our employee with medical increases this year, HSAs and you take a family making $15 an hour -- that’s great as long as you don’t get sick. If you get sick you pay out a deductible for one year, okay we got that, okay we’ll pay that back. Then you get to the second year, okay, now we’re talking about getting a little deeper in debt here. Third year they’re screwed. How much more can I ask them to contribute to their medical? It’s tough to get by and you go, but why aren’t more people going and taking these jobs? Then maybe young people shouldn’t be looking to fill the manufacturing jobs. Or maybe manufacturing should pay more. • I’d love to pay more. As soon as you pay more it puts more pressure on going to Juarez. How important is it to stay close to the technical schools? • I think it’d be very beneficial. I don’t know that we’ve done it very well here, and I say that from my company’s standpoint, and I think, for the most part, in this community. The big challenge that a lot of the young 87

people we’ve hired, some of them are coming in with four year degrees in something like English, or social work, or something like that, and they can’t find work. Now they have this debt of $50,000 - $80,000, whatever number it is and they’re working $15, $20 an hour jobs trying to pay that off. That’s going to last until they’re 40, right? It’s a tough place to start preparing yourself. • It’s discouraging for them. They go out and they do get a job, then between a tax load coming out of it, a lot of kids get out of school, get their first job, and they go, “What’s FICA? What is this?” So, they go get that lesson, then they get the health care lesson, and then they get the insurance lessons, and at the end of the day they go to the gas station and they go, “Oh, there went this week’s check.” And it’s empty. But I think encouraging them and fighting for them—when you align a school with a work force and an employer, I think there are some benefits there when the school and the employers all work together, and make sure that you’re catering the training and the educating so that the school labor force matches the work labor force, and, I think, match work ethics. STEM Labs here in Litchfield they saw a lot of neat things happen there and you could see the wheels turning, you could see even some of the work ethics starting to build, that you need to work for something to earn it, that sometimes life is a giveaway, and you’re given a lot of things. I think more and more you’re seeing kids being challenged. And I think kids that normally have been challenged young grow up into adults that like to be challenged, and meet that challenge. I used to work at a company that partnered up with a school -- and it was a long ways away -- they gave an awful lot of folks an opportunity to get an accredited engineering degree. That really built their labor and workforce up. It really did. So, there are a lot of advantages there that don’t always have to be right next door. • I know we were looking for welders. I heard of a coalition getting together and starting their own welding school. We have technical colleges surrounding this community, so I didn’t quite understand that, but I wasn’t close enough to it to put my arms around it, but it tells me there’s a misalignment there, okay? We talk about our employees needing to be more efficient. It’s not management telling them, “You’ve got to be more efficient.” It’s training them how to be part of the team, how to be more efficient, you know, “It’s your job to be more efficient.” Is that coming out of the technical schools? I don’t think so. I don’t know if we teach “lean” manufacturing in the technical schools as a base line or much less than high school, going back to, “how far back do you take it?” • Going back to what you said before, we train almost all of our own programmers. We take kids with good math skills, and it’s six to nine months to get them up to speed -- and that’s not efficient. I lost one of my good kids the other day. He’s 21 and he’s going back to get CNC 88

programming certification. He’s worked for me about a year, and he’s getting close, but he wants to go even further. So I spent a year with him and now I’ll be losing him. Hopefully I can get him back in a year and a half. But there’s the other part. A small guy like me, I train him, and I can’t afford to pay him what the big guy can pay him and then I lose him to somebody else. I have to start all over again. • We see that as well. You put a lot of work into training them and they just start getting up to speed and it’s either more pay, day shift instead of the soft shifts, and then they’re gone and you’re starting it all over again, the whole training picture all over again. It’s hard. It’s very inefficient. • And if you could get them coming out of the school at least threequarters trained so then we just have to train them how we do things rather than the basics. That would be a plus. A tech school administrator told us that something like two-thirds of applicants to tech school require remedial work in math and reading. They don’t have sufficient skills going in. • I believe that these kids—I actually put them through an unofficial math test to see if they, at least, understand the concepts. Because everything’s math in CNC. Everything is math. If they just can’t comprehend math I really don’t need them. • We used to do that, but we gave up because the results were so poor. • Discouraging? Yes. Let’s go through something we call the heartburn index for manufacturers. It’s a list of challenges or concerns that face manufacturers. Tell me what you think. Let’s start with competition from foreign sources. • It’s growing. • Same for us. Our customers are global, so they can source globally. They produce around the world, so yes, foreign sources. We’re kind of in this niche market we see more people coming into this market from Eastern European countries, and other spots. What about the effects of home-shoring? • In our industry we’re seeing a lot of foreign competition, but we’re also seeing some parts of the world that want to buy U.S. made, they want to buy things out of the United States, not out of China, or different places. That’s kind of what we’re seeing in our industry. How about government policies and regulations as a source of heartburn? • My rule is to stay small so I can stay below most of those mandates. 89

As an individual company, individually owned, I keep a close eye on the employment line, so that most of the stuff they put in doesn’t apply. • I know that every year that goes by the HR rules get more and more complex, more and more files, reports, workers’ comp, this report on labor, garnishments. It seems like an awful lot gets put towards the HR teams and in a growing business you almost have to hire more HR people just to deal with a lot of that influx of requirements. A lot of it is healthcare driven. How about that, the cost of health insurance? Is it getting fixed? • How were you thinking it was getting fixed? • (Laughter). • It’s getting changed on the back of the employer. The cost is pushed to the employer. • There were huge increases last year. This year was flat, but it was 30% up last year. That hurts. • I think one of the changes is it seemed to—if you have kids 25 and under more and more of those are going, “Hey, I’m under mom and dad’s policy and I’m going to stay there.” I know folks that their kids long ago would have been far away under their own policy, and now it’s like cheaper. You can’t blame them. They’re going a cheaper route there, but that puts that load back on the employers, because now, instead of taking care of one, or two, or three, they’re taking care of five, six. • You were asking if Obamacare has helped manufacturers. I think it gave a lot of people that didn’t have good insurance coverage. I’m not clear on who’s paying for that, but there must be someone picking up that bill sooner or later. Does that make our medical claims go down because now everyone’s insured? Thirty percent last year, even this year I would say it averages somewhere in 10% or more depending on how well you negotiate from year to year, and then again, how well your employees did, because a lot of that’s based on how many claims you have. When you go to negotiate how well did your company do? Well, x number of hip replacements by whatever, and a serious accident, all of a sudden your premiums are going to—you’ve lost your negotiation—how much have you paid out, so, it’s bound to go up. I don’t see a change. And, last I looked, I talked to the plant manager in China, he gets sick over there, they put you out the door and find somebody else to come in. The health insurance over there—there’s health insurance over there, but for what you pay for an employee here in Minnesota, we can employ ten Chinese. Just for the medical benefits. That’s serious competition. How are we being competitive now? Now you understand why there’s such an urge when the CFO is looking at us and saying, “Wow, look at my labor policy in China. Why aren’t we doing this in Litchfield?” And how much of this can go over there, or to Mexico. At the end of the day it’s all about what drops to 90

the bottom line, labor and everything, your medical, fixed cost base. It’s a big deal. It’s pretty easy math. • And it goes back to if you want to recruit good people you have to provide the medical; if you don’t, they’ll go somewhere else. That’s how the entire thing started. If you go back in history when everybody was trying to get good employees after the war, one of the reasons to get a good employee was to provide medical insurance. That’s how the entire emphasis of medical insurance being picked up by the employer got started. • That’s how the whole thing got started, that all of sudden, the employer is responsible for your health insurance, and now it’s becoming one of the biggest checks I write. • The only way to stem that is, we’ve had some good wellness initiatives, certainly not enough. This should have started years ago. We should have seen this coming. Now that we have older employees that are experienced. They’re good, but their bodies are giving up. They can’t walk the concrete anymore. And I want to get to retirement now. I want to get my Social Security, and I’d love to have some extra income, and then I get some extra income I get taxed on everything. It makes no sense for me to work. • Should we be doing more work in that area, in the wellness area? We’re doing that now and the premiums our employees are paying, and the extra they’re going to pay if you smoke, and they all do now, our company does that now, and you pay a lot more if you smoke. Your habits, you’re going to start paying for them. It adds more and employees go on paying. • I’m not paying that kind of money. It’s like a peer pressure thing going on and they’re coming and really getting after it because the responsibility was given to them. I can’t do any more than that. Is there greater stress in attracting and retaining employees if they want health care, or salary, or wage? • It depends on how old they are. • I think health care is a given. • I have a different scenario. It’s wage for our work. I can put in all of our benefits in the ad and they just want to know “What’s the wage?” • Especially the younger ones. The younger they are they only care about a dollar, “Can I take off because I want to do six hours tonight instead of eight.” and, “Can I use my Facebook at my work station because I may get a message from somebody.” • We all laugh, but that’s a real thing. • It’s because they think the medical’s a given. • There’s a common wage and vacation time.

What about shipping and logistics costs as a source of heartburn? • We ship pallets, we ship boxes every day five days a week, sometimes on Saturday. LTLs, Fed-Ex, UPS, eight inches of snow, they’re there picking up, regardless of hours. • We had a couple of hits this winter with the East Coast snow storms, but there’s not much you can do about that. • We’re having a little bit of an issue on the in-bound stuff that’s coming because of the winter for the last few weeks on quite a few things because… • We have probably three or four products where we had to air-ship because of the port strike. It takes usually 40 days to come across the ocean. Some of those shipments we’ve been waiting for since November. • We were saying for this year we’re expecting freight income to be a greater driver. This is a new one this year that we’re talking about, but it is developing future leadership within the firm. We’ve talked about the aging workforce a little bit. How much of a source of heartburn is it that people are retiring? • Some of us don’t think that’s much heartburn at all. • (Laughter) • For some of us it’s been such a long time, you look at your workforce and you see an aging workforce and you have to start planning for the next generation. I think it is important to develop leaders from within, so for us, yes it’s an initiative you attempt to deal with. • I was just going to say we’re working from within, too, in our succession planning. No, we’ve hired them into the position so that we have a growth pattern within a five year plan. • What you’re saying is get them into those positions right away, because you can’t keep it a secret, or next thing you know he’s sitting there going, “I have a better offer.” • That’s right. Exactly. • Is retaining as much as a problem as the attracting for you? • No. It’s attracting. • Once they start they get it, but, yes, it’s just getting them to come through the door. • Six months you know whether they’re going to stay with you or not. What’s the most important driver in your growth: new customers, new products, achieving ISO certification, developing managers and leaders, or enhancing supply chain relationships? Which is the one that pops out as maybe the most important, and which is the least important? 92

• A couple are givens. ISO is a given, I think, nowadays. • We’re not ISO. • We don’t have any intention for that right now. • Growth is number one. If you don’t grow it’s—growth is number one in my book. It makes all the other wheels turn. • And you’d be servicing your existing clients and if you’re doing Fortune 500 companies or automotive, etc., you will have some kind of ISO program or something. That’s a given. You’ve got to think that you’re doing it right with your current customers because they’re going to be bringing you the next current customers. You’ve got to be working that. And it’s always looking for where do I diversify to, or where can I pick up another good customer that I can grow with. Some of our biggest growth has been in takeover business. Other people let our customers down and we come in, pick it up, and it’s very reactive because they’ve been let down, and products and lines are shut down, etc. so you’re scrambling, but you pick up that growth and you see how you’re partnering with them. I always like to think we’re partnering with our customers. Again, you can partner all you want to, if your price is too high, partnering gets pretty old pretty quick for them. • But they might take a little extra price if they have good partnerships with you. • A good buyer will, but I tell you, the buyers are under a lot of pressure. They get their goals just like us, five percent down, they want a little better price, they’re under a constant struggle, they get their little trip over to China, and go, “Look at these bids they’re getting over in China. Boy, we’ve got to talk with you now.” • And big corporations don’t let buyers stay more than a year anyway. They roll that over fast and change. • Keep trying soft sell down. • So they aren’t influenced by a relationship. • Oh yeah. It is nowadays. To have a relationship with a buyer nowadays is pretty rare. • We hear that in our peer council groups too. • I go with new products and new customers. If you don’t have those two the other three take a second, third, and fourth seat. They really do. You have to keep growing and expanding, new products, new customers, new markets. That’s what you’ve got to look at all the time. • We do a lot of medical, and medical’s really changed a lot now. It’s harder and harder. Once you’re doing the medical it’s hard for them to leave you because it’s about re-foundation is so difficult, but to get in with them you need to be really doing the development cycle and when you do that development, you’re not developing product, you have developed it, they are in beta testing, and when they go into production, you better have 93

the equipment and a process that you did the beta with, ready to rock and roll for production. Thatâ&#x20AC;&#x2122;s a much larger upfront investment for getting into medical.

FOCUS GROUPS

Albert Lea March 9

Riverland Community College

Let’s start by talking about your supply chain relationships. Have they changed? A lot of people talked, when the economy went south a number of years ago, about how their supply chain relationships got so much more demanding. There was little negotiation or wiggle room in those relationships. Is that still true? • The demand on our supply chain is faster. You’ve got to be delivered daily and be able to react to orders much faster. Everything is compressing that much farther. And there’s more of a demand from customers as far as how stable is your supply chain, how stable they are from the standpoint financially because obviously they’ve been burned on someone going under and that stopped their production and so they want to know how well you check and see how strong they are from that standpoint. But I would say, yeah, it’s shorter lead time. You try to find closer, just try to meet those kinds of demands that they’re requesting, too, so some of that offshore stuff has been looked at coming back into the US. • Some of it has been for us because customers are looking to bring it in and they’re looking for someone in the United States to bring in some things. They’re more regionalized with their manufacturing. Sponsors: Albert Lea-Freeborn County Chamber of Commerce, Interstate Packaging Corporation, Lou-Rich, Inc., Riverland Community College 95

• I would say from over a few years, when manufacturing really came into being, we went from doing large quantities of parts and evolved into small quantities of parts. But for the interim, some of our customers kind of turned to the warehouse because they still hadn’t adapted to their whole culture. In fact, as we—before they were leaning but I would say that that part has come full circle to where we’re still doing small quantities. That’s great. We’re still delivering weekly. That’s great. But they pay more attention to your lead times and what you really need for lead time and don’t put you in that emergency situation quite so much where you have to really jump and run. And what about personal relationships? • Personal relationships went out the door in a lot of companies a long time ago and never came back. But it all depends on the company. Some of it is; some of it isn’t. I think it was just, it took that long for the culture to get through it. • I guess what we see is greater emphasis on quality. A lot of our customers are ramping up their quality programs and expecting us to be on board with that. And then even bigger than that is on-time delivery, just absolutely. There’s a super push on that from all of our customers. It’s got to be on time, period. What kind of a stress does that put on you to comply? Has it made you, by necessity, a better company? • It actually happens. We’ve got to be a whole lot better in production planning, scheduling, understanding our systems and being able to perform and training, cross training, looking at equipment needs and those kind of things. • I’d just like to add to that. You talked about cross training and in our industry, the wood products industry, our customer preferences are shifting from standardized to more complexity and shorter lead times. It’s challenged us to be more flexible. Five or ten years ago, you came in, you did the same job day over day, month over month, year over year. Now you come in and you could be doing a utility pole one day and you could be doing a church arch the next day. So it’s really challenged us on our cross training and people being open to that instead of being a legacy saw operator or legacy sander. Are there competitive advantages to being able to cope at that level? • We have some that can; we have some that can’t, yeah. If you’re flexible, you can maintain those shorter lead times because it’s less training curve. You can adapt to carry less inventory, those types of things. If you’re not flexible, you’re pushing out lead times, you’re carrying cost 96

inventory, extra labor, those types of things. So it can be a huge competitive advantage, in particular in our industry. I’m curious about your perspective on how you deal with your suppliers. • I see a lot of differences and I guess a lot of it really came to in the query lately as it was more trying to be successful. And we buy from probably half a dozen different steel suppliers on a regular basis and some of them just aren’t responsive to the needs that we have. I have a new customer. He needs material to come in a specific manner. I have to deliver it in a specific manner. If it comes in less than that, I’m going to get it back in my face. And I know that but I have some who have responded well and some who just seem to think it’s not necessary. • Yeah, from a supplier base, that we will need to receive quality is so important. But lead time and price would be the ones that we struggle to negotiate. From your supplier? • From our supplier. We deal with wood. When we’re placing an order, a lot of times that stuff hasn’t even come out of the forest. So we’re small compared to the Home Depots, the large trust manufacturers, those guys, so we don’t have that competitive edge for a leveraged buy. So we have to manage the relationships side, at least on the lumber side, a lot more than we do a lot of our other commodities. • I think relationships do make the difference at a business level and I believe that you pick suppliers based on their ability to deliver. And the size of your company makes a difference. If you are a very large company you have more leverage to establish whatever the standards are in the business and if your establishment is not as high a performer on the delivery side or the quality side you can get away with it. But small and medium manufacturers have to continually sell their value proposition on service and quality at a competitive price. They don’t have a choice. How formal is strategic planning in your company? Is it just you? Is it you and a couple other people, or is there a whole evolutionary process in how you plan growth for your company? • It may be largely dependent on the size of the company. A small company’s probably just a couple of people and a large bureaucratic organization could be dozens of people linked through all kinds of networks so that you’re having the same conversations with 60 countries. • Yeah, we’re a small group that really just says where’s the need? Where do we see the need? And we move forward based on that and we’re expanding right now to meet that need. If we’re going to build it, we run it 97

by all the tests. Well, I think this has been characterized really nicely. It depends on the size and the maturity of the company. Oftentimes in the early stages, one person thinks about these things for a shorter period of time. And then as companies get larger, more people become involved and think further out. And one of the challenges is not only the thinking of the plan but also the communicating because thinking of it is one key step, but carrying it out is the most important part and the carrying it out is relative to how the communication’s conducted. So it might be nice to, as we continue to talk about this, talk about your efforts to communicate your planning as well as any thoughts you have on about how you arrived at your planning. • You have to figure out what you want to be when you grow up. It’s very easy to get sidetracked with trying to be all things to all people all the time. I’ve worked in small companies with less than 12 people. I currently work in a company that has more than 150,000 people. So there’s a slight difference in how they approach things probably. • I would say, yeah. If you’d asked us two years ago, it would be more us just reacting to customer orders as they came in. We’re much more focused now. We have a more specific plan. We know we need to contact this many. We need to identify that group. In the last year, it’s gotten much more defined as to who we want to go after and how we’re going to go after them. It was easier before because it was word of mouth. They just came. And has it had the kind of success that you had hoped for? • It has. It’s just rolling out because we’ve only been into it for this last year but we are finally starting to see the fruits of that happening now. So ask me that in another year and I’ll really have a better answer for you but it’s much more structured now that it was before. • I would say even a company our size, which is a total of 28 people, we’ve evolved into where I sit down with my staff and that’s a combination of purchasing people, designer/drafters, estimators and we talk about our customers. We talk about where potentially would be a place where we can grow because every one of those people in this office has got some interaction with their customers whether they’re purchasing or whether they’re landing drafting and so I not only get their feedback but I also get their buy-in when we decide who potentially are the ones I should be going after. Anybody else? • As a manufacturer you have certain capacities for different types of 98

products. As you mature you can look at your book of business and say, we’ve got some capacity in this area. We’ll look at strategic growth in this area in order to be able to fill our plant, so to speak, production-wise. • We’ve spent a lot more time talking about growth and how to prepare for it, how to deal with it, what is the company going to look like five or ten years down the road this past year I think that we did prior to that. And a lot of our focus has been how do we get in front of it? How do we prepare for it? How do we get ourselves in the place where we need to be because we see our business changing quite a lot over the last few years and we expect that to continue going forward? So how do we have the flexibility, capacity, the cross training? We’re handling more and more and more parts and we stock a lot of parts and that’s quadrupled over the last three years in the parts that we stock for our customers. And systems, people, processes, equipment, capacity, flexibility, all those kind of things that we have to get ourselves in front of and then what kind of market are we going to go after, what type of customers and how do we reach them. Have you been surprised by some of the decisions that you’ve made through that process? Is it not all intuitive? • I think just analyzing your business through different aspects is giving us a much better understanding of our business and where we need to go with it. We can see more clearly that next year things have to be different in this or that area and then we can formulate plans on how do we get there from here, but, yeah, surprised that as much as we’ve changed things in the last three years, there’s so much more that needs to be changed going forward. • I think that the strategy for growth is somewhat dependent on the product that’s produced. In this room, even, we’re represented by two different kinds of companies, a company that has a branded product, in other words, they’ve identified they go to market with a brand that the consumer buys. Maybe they don’t sell to the consumer. They sell the distribution who sells the consumer and you have products like ours where we solicit business from people that make branded products and provide for them. So our customer base is different than someone who has a branded product. So the growth is a completely different strategy in that process. People who solicit from other manufacturers probably don’t have as much of a marketing plan to go to the consumer as those who would go direct to a consumer. And so I think those are completely different strategies. The performance ratings for those two different companies are completely different. You need to look at staffing differently and you have different kinds of sales as relates to that, as part of the process. • We’ve got to look at what our customers are, what our customers’ needs are and be able to say, okay, down the road, you’re going to need this or 99

they may want that because they’re going to see it eventually, too. • And you’ve got to try to be ahead of them on that. Let’s move on. What do you think of the economy? • Growth. • Absolutely. • We’re growing. We see a gap in our industry for the product that we provide. We feel like if we don’t expand now we’ll be behind the eight ball. So we’ve made the decision to go forward with that. • Both. • As strange as that sounds because we have one part of ours that shrunk because it’s ag and then you’ve got growth on the other side. So we’re planning for the growth side to basically offset what we’ve seen happen on the ag side. • We’re planning for growth as well. We’re seeing 15% to 20% growth year-over-year by the next two or three years. We’re a little nervous about what that means, about being able to pull in 40 to 50 employees in the next two to three years. • We don’t really know the impact of North Dakota yet. There’s a lot of business in Minnesota that will be impacted by the downturn in North Dakota because of the oil dollar. I’m going to go through a series of things that we think comprise a heartburn index for manufacturers. Tell me what you think. The first one: government policies and regulations. • We’re hoping that Iowa would want to annex about 30 miles north. • I guess we see it increasing, the things that impact us, the requests for conflict material type documentation, those kinds of things. We’ve got other customers who work with the government or the military and when we do quotes we now have to align right down to our profit margins, all the way down and the type of materials and everything and all that. • Yeah, it’s basically you have to—our customers require a statement where you list out all the materials that go into the product, which we make basically parts, so one piece part, so steel or the brass or the aluminum or whatever, it doesn’t contain anything that comes from a banned area that’s in conflict, for example, in Africa or someplace like that, so the Congo is one that comes up quite often. • It’s the time of filling out all that paperwork and sometimes you just plain don’t know. • We’ve seen some of that same thing. But I’d also tell you that in our case it was dealing with the military. Also, OSHA is alive and well. If they haven’t been in your plant lately, they’re certainly going to be. Other parts of government that are probably giving me heartburn are when we decide 100

on some of our tax regulation two weeks before the end of the year, going backwards. It is not tax planning when you do that, which is really an irritant. What about the cost of maintaining employee-related healthcare coverage? • Oh, we had the healthcare bid out again this year as we do every year and the best that we came back with was 58% increase and, as a company, we have 95% participation for employees and their healthcare and that was a huge hit for a company like us and we had to absorb most of that rather than passing it on it to the employees, otherwise we’d have had people heading for the doors. • We had very good rates and that’s part of why we were hit so hard because with the new Obamacare system now you have to go to the average. But we were penalized for being a low-risk company, policy here, so that’s why we got hit worse than if someone had a poor safety record, they would have had their healthcare costs go down. We were not in that situation. • So as a company, we had about a $60,000 hit per year and that’s with the two jobs. We’ve got to figure out how do we foot that cost. • So same story, all our best groups got hit the hardest. You’re getting better rates because your health history is good. They threw that out the door, so we saw a 60% increase in our healthcare. I pay 100% of my employee’s healthcare, so I have certainly really good participation. Unless they happen to have a spouse that has a better plan, I will pay up to what it would cost me if they can do that. But a 60% increase and I bid it out several places. We ended up joining a professional employment organization, which is basically a company that puts together a whole bunch of small groups. Your payroll goes to them because by law they have to be paid not by you and purchase healthcare for small companies on a large group basis, okay. So my healthcare rates, as far as what the insurance costs us, had a fairly minimal increase, which is good for my people because if they were covering a spouse or covering some kids and their healthcare went up 60%, it also costs you as an employer to belong to that professional employment organization and they promise to take care of a lot of your HR work over to them. So I joined it for 12 months and it doesn’t cost me any less than it would have if I would have faced the 60% increase. The price tag’s the same. I’m getting some HR work for that different price tag. Whether at the end of 12 months it’s going to be worth it, that will be the question of the day, but it did keep my employee rates, especially for those people who are adding family members, in a manageable state. • Government’s not about making economies for business. They don’t 101

really care about how smooth it is or easy it is for business. They really don’t. They’re about large unions and they’re about themselves. And so the values of Obamacare certainly benefit people. I have a daughter who has Crohn’s disease. She’s 22 years old. When she turns 26, before Obamacare, she wouldn’t be able to get insurance. She’s a great, healthy kid. So I think it’s a good thing in that respect. But the way they’ve rolled it out really impacts small business. Small business is critically hurt. Small groups are critically hurt by the plan as it exists under the standard way you look at the plan and it will be for several years until they go and decide that if they want to reorganize it or straighten it out. I do think the size of your company makes a big difference, though. If you’re over 100 employees, it’s better unless you have a lot of really sick people. At your companies too, I’m sure you had a negative impact on healthcare. I’m sure it was more difficult. • We didn’t see any impact from a cost standpoint. Now, I say that from the standpoint there’re some premiums that go along with Obamacare that you’ve got to pay that are tacked on, so you’ve got those little additions that add up and then there’re some reporting requirements that are causing some issues that we’ve got to do on there. So that’s what we face and that’s the reason for the clinic to see if we could keep some of those costs down by doing it ourselves basically. Do employees take healthcare for granted? • I don’t believe that with Obamacare it is true anymore. I think that a lot of employees who have tested the market know the value of healthcare now. It’s really educated a lot of people in what it actually costs to obtain insurance outside of employment. So I think that’s changed significantly. • I’m really trying to maintain that and it’s really a lot about tracking help. And I would agree with him that we’ve communicated pretty well with our people. They understand where those healthcare costs have gone and understand how their deductibles used to be here and now they’re up here. I think they got the picture and I think if you poll this group I think you’d find that most of us would love to get out of the healthcare business. But this didn’t do it. And how many, have been able to absorb increases without passing them on to your employees? • Well, that’s our challenge. We passed some of the cost on when we rolled it out. We made sure that everybody understood how much healthcare costs and how much it went up and how much company was absorbing versus how much each employee’s costs were going to go up for this year. And that was a successful rollout in that sense. But we’ve got to be creative in how do we recoup those costs. We’ve got to be more 102

productive or find some other areas to cut costs because for the vast majority of our customers, maybe all of them, we’re not able to pass those costs on. • Don’t misunderstand that I’m only paying for my employee 100%. I’m not picking up spouses and children, okay, where a lot of these people are taking a percentage of and covering just as much as I am but they’re taking a percentage of the family. How about the issue of attracting and retaining a qualified workforce? Is it still a looming issue? • Absolutely. It’s bigger. • It’s a big one, especially in the technical fields, maintenance engineering, boiler operators, refrigeration people. • It’s a challenge because you’ll get a person in the door, go through all the training programs and about the time that you get them on their feet and they’re actually productive, they can take that same skill and go somewhere else. • Training, too. I mean, we’re using South Central College for training for our CNC group because hiring is a challenge there. You’re never going to get an experienced one in the door, so you find the aptitude and then we just did our first session about three months ago, specific training on CNC coordinating with them on that. I think we’ll expand that in the future to keep developing people and hopefully that’s the incentive, too, that they’re developing and we’ve got the training to help them get there. How important is the right relationship with the local technical school? • That’s the key. That’s why we went to them. They have a very good program with Mankato and they laid out a specific plan—they also had a program they’d already done at Oneonta with one of the companies and so they basically took that program, changed it a little bit for us and then worked it into a three-month schedule for us on there, so definitely critical. And I’m sure there are other types of things, too. Sometimes we use outside companies, though, too. For welding, we use one of our outside suppliers for welding. They do training at a no-cost deal for us or a minimal fee, and so we can bank on their expertise. Obviously they have a vested interest creating those welders because that’s more welding supply obviously that you’ll use but you try to leverage that as much as you can, too. Do you have unfilled jobs because you can’t find people to fill them, or is it just about skill levels? • Technical skills. 103

• Or you fill them but it’s not with maybe as a qualified person as you may typically want. But at the same time you need to fill it and you find, I guess I’ll say it, the aptitude that you think’s right and then you just develop it from there. • And, again, it varies per industry. Ours is very, very specialized. How does Riverland address the challenge? Are you getting sufficient numbers of students to come through to help fill these jobs or where is the challenge there, anybody? • We’ve been to a number of these sessions and we’ve heard the need, so the fact would be we talk about how to reinvent our programs. We used to have CNC. Years ago that program went away. We’re at a place to buy CNC equipment again to redo that program so we’re trying to work our way back into it. So we’ll partner how we can. Something else we’ve heard from manufacturing is there’s a greater connection between mechanical and electrical. Just recently our departments got together and we created a new program called electrical maintenance technician. It’s an industrial position that’s focused on PLC and motors and controllers and those kinds of things in the plant, so those are more automated. So we’re trying to respond through some programming type. We have a bit of a shortfall in our enrollment coming through. Some of our programs are pretty strong because they have a history, like electrical and IMMR are pretty strong because they have great manufacturers that hire from our programs. We can always have more. Part of it is students are necessarily choosing to come through those programs. We have other programs that are a little softer. I would say that if industry could help us by not hiring people before they graduate but at the same time I know you need people, so this is give and take, how do we make sure we have the right length of programs to fill the people with the skills you need. If it doesn’t take two years to do something, then we should know that too because, I mean, we could adjust and get somebody faster to you or your facility. • I might take that one. We’re increasing our relationships with the high schools and I think you’ll see that in some of the hands-on courses that we can offer. But the other thing that’s happening is with parents. Parents don’t always think their child is going to a four-year university right out of high school and maybe they will eventually but there’re a lot of options at the two-year level. And so rather than going in to these high schools and sitting there at a table during lunch hour and saying, come here, I’m Riverland, we’re offering career exploration, we’re offering financial aid night, we’re offering more on the career development side than the information side and we’re hoping that that way students and their parents get to broaden their perspectives that these are different jobs than they were in the 50s, 60s, or 70s. 104

• About three years ago, one large local company approached the school district and said we want to start filling the skills gap. And so we have been successful for three years now. This is our third school year of partnering. It is with a youth apprentice program through MDE. We had three the first year with you and I believe two of them you have hired on the first two years. They’re folks that are— • One’s full-time and one’s part-time while he’s going to school. So he’s going for a degree after but, yep. • And we started with three businesses. We currently have been working with six, three are manufacturing, three are automotive -- two automotive and one truck, diesel. And we’re always looking for other sites as well. So it’s been fun to watch it grow. And the kids, and their parents are the best advocates. I mean, I remember one young man, his mother, I swear she probably told every single person she knew how awesome it was in the plant because it wasn’t what she thought of as they offer tours. We bring them in. Their parents see and she was just quite the advocate for how cool it was in there and it wasn’t what she thought it was. • It’s funny. On tours, we probably get the most kids going through on the economics class. I don’t know if anybody else does that. But the economics teachers, that’s part of the requirement for their class is to go do businesses. We’ve had more high school kids go through our plant because of the economics class and it’s just part of the requirement to go see a business in town. But, yeah, I don’t know, we probably have 40, 50 kids a year go through because of that. They’re not looking at manufacturing necessarily but they get exposed to it. But they’re seeing that it’s not what they thought it was. • I’ll say that the projected shortfall in skills and jobs and the appropriate labor force for us is so large that we need a regional collaboration. There’s nothing wrong with you going to Rochester, other cities, or going to South Central. We all have different strengths. But we must understand that every local community college is a vital economic piece of where we are. We need the high school students, now for the high school students to come here locally we need to make sure we show strength in those programs that we have here. But we can’t do it alone either because the government is not going to fund everything. So we need the businesses to also partner with us in terms of the areas where we are strong. What is it that the business partners are willing to invest in our programs? What kind of equipment can they support? What kind of endowment can you give us for a faculty because when programs enrollments go down, the tendency is for us to cut those programs? But if we have an endowment of guaranteed faculty for some time, that makes it possible for us to ride the storm just like you two in your businesses have to ride the storm. But 105

I think it’s a regional partnership. The institutions in MnSCU, we have to collaborate, not necessarily compete all the time. The industries in our local area have to collaborate with us and the government has to step in and then our faculty most definitely to do the program like the high schools. That’s a very important piece. So if I was just going to summarize, it’s a regional collaboration that’s going to help us fill those gaps long term.

106

FOCUS GROUPS

St. Paul March 11

Saint Paul College: A Community & Technical College

Let’s start by talking about succession, specifically retirements. Anybody have heartburn about retirements in your company? Is it going to do something that might change the way you operate or might put you at a competitive disadvantage? • We have about 500 employees. To be honest with you, it’s startling if we look at the number of retirees we’ll see over the next 10 years. The number of people that are going to be retiring in the next 10 or 15 years is just incredible. We have a lot of people that have been with our company 20, 30, 40 years. We’re in tool and die machining, so we don’t want to turn out a lot of people because they have a lot of knowledge about how to operate equipment and to produce products. So we have a major, major concern with that. Bringing in the next generation, whether for leadership or employees is critical for us right now. And finding those people is a real struggle. Everybody’s well aware of that. And we’re addressing it. Our succession planning is not as formal as it needs to be, but we are working with a consultant group right now to better formalize that. We have programs to make sure we’re bringing the next generation of people through the plant. • What would you say is the average age of your employees right now? Sponsor: Saint Paul College: A Community & Technical College 107

• I’d say it is 52 or 53. • It might have come down the last few years. • We’ve only got about 50 employees. But the retirements are not just in production or distribution area, but also in the support areas. And that’s where we’re seeing it right now. That’s where we’re feeling it. Some of our systems are legacy systems, we made them ourselves from an IT perspective, and individuals are going to retire from there. So we do have that concern too, so it’s more on the soft support side. We’re trying to address that now too. We’re trying to update our IT strategic plan so we can get ready for this event, which is coming fast. • We have a large population eligible to retire right now. So they can leave any day. Part of the problem with succession planning is that we weren’t hiring people in the economic down turn, we were actually laying people off. We just didn’t have people there to train into these other jobs. So now we are hiring, which is great news, but we’re hiring brand new people. So trying to get those brand new people not only trained to do the job but then also trained to move into these other roles is a pretty long learning curve. What about other skill gaps within the company? • It’s still a huge problem. It’s still finding the skilled people. We do have people in training, hopefully coming up. But it’s difficult to identify all the different needs. But from a skills gap point of view, we’re sort of an in-between, we don’t need the high end machinists or the higher end levels, but we do need a skilled person who shows up every day and wants to work. Those are hard to find still too. It’s a difficult person to find these days. • I’d like to piggyback on that just a bit. The type of work we do is not necessarily on fancy new laser machines. We need employees who can weld, do some layout, fitting. But to find the kind who will show up every day is nice too. Being able to read blueprints, or some basic things that you didn’t use to have to think about when you were hiring 15 years ago. It was just assumed. And now people say, oh, no, the computer does that now. I’m just supposed to be able to punch it in and the machine knows. But, no, you still have to be able to go through and make sure the holes are in the right spot and the parts are the right size. Our plant manager goes in now and has to teach everybody how to use a tape measure. It seems that people know how to use the fancy machines now, they know how to do the input and know what the CNC kicks out. But we need to get back to some of those basic human skills. (To a college administrator): Is it still true that one of your challenges is that many, many incoming students need remedial 108

work in reading and mathematics? And if it is, how does it affect how you do your work here? • We’re an open access institution, so we don’t have SAT or PSAT scores. And the span of the age of our students is between 16 and 69. It’s a very broad range. You have some students who are still in high school, some who have just finished high school. Some been out of high school. The average age is like 29 years old. Then we have veterans. We’re 61 percent diverse. If you’re one or two levels below your reading, writing or math, we work with you to bring you up to the level for the vocational career or technical program. There is applied math skill-building for those who are transitioning into machining, welding, sheet metal, pipe fitting, plumbing, or transportation programs. We’re working with some community-based organizations and adult education service providers where students can get those skills at zero cost. So we pilot this thing for fall for about 200 students and spring 200 students who did not score very high on their reading and math and we’re providing them what we call intensive math skill building, and reading and writing skill building. So it doesn’t cost them a dime. All they have to do is put in the time. So they’re taking a couple of classes on campus, and they’re taking these other things also from these community-based organizations also located on our campus, to get those skills up. Now when you transition to a program like machining, the retention rate is 100 percent. Because the faculty will do what they need to do in order to retain the students. Actually, the skill sets that you need to have in order to be employed into the field, as a matter of fact, when you go down there you start out at the very basic. Micrometres, callipers, gauges, fillers. Then you get into an advanced level, like flatness checking, coordinate measuring machine, EDM. So to some extent, what we’ve done is very practical in terms of providing the skills sets. And then, we have certificate programs, like right skills programs. There’s a shortterm program. It doesn’t mean that you’ll be a machinist. It gets you to the operating level of a person you’re looking for as a capacity now, and you can work with that person to make him a machinist over time. They may work a shift for you and they may come to school at night or during the day, depending on when the shift is. But it’s something that we’re grappling with, this whole notion of remedial education. Because we don’t have a filter filtering out the students. That’s the beauty of community colleges. They’re open access and we provide opportunities to bring you up to the skillset you need to be at the college level and transition to become a successful graduate. What’s the biggest challenge in terms of finding, recruiting and retaining employees? Is it entry level people? Is it people with some education with good technical school background? Or four year 109

people? Where’s the place that you really need it? • All of the above. Back a few years it wasn’t as difficult. At the machining level it was, but maybe the engineering and management level it wasn’t as bad. But we have several openings in management and engineering and it’s difficult to find good solid people this day and age. Does it affect your financials? Definitely, because we’re also in the process of acquiring organizations and my biggest fear is when we acquire and try to grow aggressively, it’s so difficult to find good employees to grow fast enough. In our own plant we’re finding the same thing now. So at the end of the day, if you have to pay more, it trickles down to the bottom line, and it could be revenue or it could be just the training that you have to go through. But we’re finding it difficult at all levels and there just aren’t enough solid people out there coming into the workforce. • We’re a small company, so the entry-level individuals are not a problem. The higher end, like engineers and designers is more of a problem. We’ve had to bring them up through the ranks and train with them. Now if I had to hire one of those today? I don’t know where I’d get that person. We tried to hire an engineer out of school, and we spent six months training this individual. And we explained to him that we’re going to invest a lot of time and money in doing this training. And it ended up, after we trained him, he went back into his original field. That’s where we struggle. • Everybody goes to school, designing and detailing. They want to be the architect or engineer creating this really fancy picture, 3D model picture. We need somebody to detail the parts. And it’s our highest turnover position. We hire constantly. And for every four that you get to hire, maybe you get to keep one. But it costs a lot of money putting that time into those people. As they’re going through school, because you know they get through school, the same thing. They get done and they’re like “Oh, the grass is greener over here! It’s a better picture.” • We’re fortunate we don’t have much turnover. It’s just on the upper end that we’ve experienced turnover, just for one individual. But the people that we hire from St. Paul, they come in and they’re productive very quickly. It used to be six months, a year. Now it’s not even weeks and they’re producing. But they’re starting out at the lower end and we’re giving them a position where they can produce. But what we also struggle with is the type of person in today’s world. Our business is based on overtime. And we run lean, so when work fluctuates, the hours fluctuate. And the past few years it always fluctuated on the high side, because business has been good. Going back everybody took overtime for granted. I probably worked 7 days a week for the first 15 years I was in business. But that individual isn’t there anymore. That 110

individual wants to work the minimum. And we’ll post minimums for each department, you know, 46 – 50 hours. And predominantly, those people will be at 46 hours. How does that affect wages and benefits? When you get into that side of it, what is the effect on wages and benefits throughout? • We’ve been able to maintain our business, or grow our business. But it comes at a cost. These lower entry people now are actually demanding more. We just went through a round of general increases. I thought it was a nice little package. But they thought it should have been like two or three times better than what we showed them. They’re doing it. “I can go here and get this job.” So it does cause wage pressure, we have seen that. • What do you do about it? • We’ve actually increased the wage. Some people were going to leave so we had to increase their wages. But it’s allowed us to retain our business. • We’ve seen wage pressure also. We haven’t increased product prices -- we’re profitable -- but we’re putting the squeeze on that too. So we’ll have to look at raising the prices on our products. • When you talk about a war on talent, there’s a shortage in kind of all areas, but more on the worker bee type of position. There’s not necessarily a shortage of executives and CEOs. Where we see a shortage is in the people, the individual contributors, the people doing the work in a variety of skillsets. You’re not seeing a flood of applicants as even we saw a few years ago. Sometimes if you want the right skill, supply and demand, you’re going to pay more. So there’s an effect there on the wage. • And the other thing is the soft skills. Getting people who are willing to work, you know overtime, as business needs – who are willing to come to work every day. Some of those soft skills. So even if they have the technical skills and can do the job, just some of the soft skills are seen as being a challenge. • We can see with the younger ones that their personal time is more valuable to them. You know, the older ones are more dedicated. If there is overtime, they say, I’ll be there. I’ll do it. Do you formalize soft skills training? • I mean it really is a part of setting expectations. You know, here are the six things that you need to do. And of those six, 5.5 of them are soft skills. And you rate people on those skills, providing feedback and evaluations. • Attitude, coming to work, those things, and we’ll train you to the 111

jobs in assembly and those things. We’ve had limited success. Because they usually hear that manufacturing pays better than retail and you’re going to get more hours. Now we’re seeing that retail is starting to catch up with us. But limited success because they’ll get out there and they’re like, “I’m on my feet the whole time. I’m sore.” You know they’re going from maybe sedentary customer service jobs to have to be up and working, and so some success, but not as much as you would think. So we’re trying to give those people a chance, out of those things like retail and customer service. But limited success. • I’d say the same thing. We’re been able to transition more people from construction industries When housing was hot in ’05 or ’06, a lot of people were getting out of our fields, and going to those industries. I haven’t seen it come back, to be honest with you. Back to your question with the wage pressure, it’s at all levels. We’re finding that we have to negotiate a little differently than what we used to have to do, whether it’s vacation time or other things. So we’ve done some creative things just to regenerate and try to stay competitive. Because the Twin Cities is just hopping, it’s a battle. • It’s the whole benefit package, too. With the cost on that going up as fast as it is. • And then to relate that, or tell that to the employees, they don’t listen. They just want to see that dollar, that hourly wage. And when you tell them that their insurance just went up 25 percent, 30 percent, they say, “Yeah, so?” • Isn’t it something though? You can share their retirement, and where you’re going to be, and your health benefits. Then, “What am I making an hour?” • “What do I bring home?” • “I don’t want to work Saturdays by the way either.” Let’s quickly talk about a series of challenges that always seem to confront manufacturers. Let’s start with the cost of employee related health insurance. • We compete globally. So we’re fighting against Asia, China, where the costs are down. And in the U.S. the costs continue to go up. If you go to an auto repair place and they’re charging $140 an hour for their work. And they don’t have a fraction of the overhead that a manufacturing firm has, and we’re at $90 an hour. And if all your costs continue to go up, the bottom line is shrinking. From employees, to healthcare, it doesn’t seem like there’s any effort by government to help manufacturers grow. What are they doing to help us grow? What are they doing? To help us grow? And we have to compete globally. How can you even make that gap up? 112

Is health insurance more or less of a challenge today? • The value of the insurance went down considerably – and the cost went up. • How much have you had to pass on? • We haven’t. Our employees pay a percentage of their healthcare costs. As a percentage, we held it. Costs went up 25 percent? Yes they do go a little bit above, but we took a bigger bump. We pay 70 percent of their healthcare cost. That’s family or individual. • We try and stick with the same plan. The last three years we’ve changed, every year, trying to hold to the same level of coverage. And every year we don’t know what the increase is going to be until we get the quotes back. And we cover 80 percent, pass on 20 percent, whatever that increase is. And that increase could be 20 percent one year, or it could be 10 percent. It’s never going down. It’s always going up. • This year seemed higher, for us at least. • I think it’s based upon how the people on the plan are affected. • There’s the cost of it, right? We’ve done a lot of things with benefits to incent healthy behavior, keep costs down, all of those things. So there’s a lot of work there, by a lot of teams in benefits, and whatnot. But the things that we see, it’s what the employee sees as the value that they’re getting and it becomes about retention and recruiting and “Oh you used to have such great benefits, you don’t anymore.” It used to be kind of part of your employment brand and we have kind of chosen the path that it’s probably not going to be some of those things, a differentiator for us, and maybe other things are. We have made some changes on PTO. We’ve made changes on the medical benefits that may start to affect our employment brand and recruiting. • I think it’s one of the biggest problems facing manufacturers. You look back to even the early 2000s, it’s really just unbelievable. And if we had the ability to pass the price increases on like they do, double digit every year, we’d be fantastic. I don’t think the government is helping anybody in any way, shape or form. And if double digit increases continue -- or even single digits -- I think we’ll be in real trouble long term. It’s affected our bottom line, there’s no doubt. You have to find creative ways to manage your increases. We’ve put in internal clinics, we’ve put wellness programs in, and we’ve done everything to impact, including changing carriers. We’re self-insured, but you still have to change. It’s a struggle every year. I don’t know what the country is going to do about it, because it’s frankly out of control. Next issue? How about government’s ability to help or hurt manufacturers? • Regulations have just gotten out of control. It’s not being done at 113

the legislative level, it’s being done at the regulatory level. It is more in your face. It’s not a helpful in your face. It’s, how can we create more reporting, or create more issues. It’s frustrating. And all you’re trying to do is run a company, and we’re trying to do it in a reasonable manner, an environmentally sound manner. • I look at our ownership and the amount of taxes they pay. And the amount of money even a few years ago, that we had available to refund to manufacturers or to apply to businesses. And the tax changes over the last few years have just been incredible. Cash availability isn’t what it used to be. So again, there’re so many different aspects of government that are affecting manufacturers from my perspective, and (company name)’s perspective. The question of what do you do about is the most difficult thing. • And what’s the answer? • I’ll just say and add on to that too, it’s all levels of government too, all levels. I’ll focus on the state right now. The state’s had a big change as far as how they tax, and I know they have this warehouse tax they held back or pushed back. But it really impacts the business and even now, they have this $1.8, $1.9 billion surplus, I want it back. You know, but I talk about it. What are we going to do now? With the role of government and the level you can expect government to spend is kind of going unchecked right now. And it’s hard. What about the effect of foreign competition? • We haven’t really seen it that much, and we still see the China pricing now. It seems like when there’s a downturn is when it really comes into effect. And even though it’s there, it’s not affecting us today. But will it affect us in the future? Absolutely. And we see our pressure just from China. We don’t see anything from India. We do have some customers that are there, but they’re not driving to get the product that we provide built in India. But India is far less cost than China. • Well there are constant pressures, especially as the Internet gets faster and faster. There’s been a fair amount of re-shoring, or onshoring which has helped our business. But we’ve had to change our model. The US is not making the production it used to, compared to the other areas around the world. We have that ability by opening a plant or whatever that may be, to make sure that no competition is growing where it becomes an unmanageable issue. But, from a pricing pressure, it’s constantly there. • The bulk of our business is US-based. But the dollar exchange to the euro right now, was unhurt. Because the cost of our products just shows up like crazy over there. So we’re feeling that too.

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What about supply chain relationships? Is there still increased pressure for special terms, to carry inventory, to decrease delivery times? • I think as far as terms are concerned, we’ve been pretty fortunate as a company to have held our 30 days. But I’m hearing from a lot of other people that 90 days is sort of the norm, 45 to 90 days just seem like the norm. Some companies are paying their bills on it. I know our company, we did one company in 45 days, but they’ve been holding that pretty well. But I think if you hold feet to the fire you can do it, but it just seems that the norm has gotten to be longer terms. And like you said, holding inventory for them, so at a moment’s notice they can call and get it released. There’s a cost to that, try to build that into the cost of the product. Usually you can do it. How many of you have taken advantage of ISO certification? • I think we were just trying to look at long term where we were trying to grow our business. We wanted to escalate our growth. And we just felt it was the right thing to do. So I have a lot of that other background in me, so we’re trying to bring that type of mentality to it. As far as discipline, that’s what we need to have for the growth business. So we made a decision to go for it and it’s actually doing very well for us right now. • We’ve been ISO certified for 13 years and we’re looking at dropping it. • Really? • Yeah. It stopped being required by our customers. There’s a cost to maintaining it. We don’t see the certification as a benefit. We also don’t like the direction that the standards are going, the new standards. We’re very comfortable where they are right now. It’s working very well for our business. But the way the standards are going, I don’t know. What’s your sense of the overall economy and how is it affecting your business? • Our business, we’re booking jobs in June right now. That’s how far we can see. And this year we’re expecting it to be a record year for us. Business is very good. We don’t feel it’s going to slow down. But we don’t have a magic ball either, to see how it’s going to be. So business now is excellent. • We’re projecting growth. • We’ve had a record year since 2009. And we’ve been able to, this year, it will probably be a 15 percent over last year. Our highest was 20 percent. • Absolutely. We lost competitors all the way through. And when the 115

work turned around, there’re fewer people to do it. And we have niche. Which helps. So we’re looking forward to it. • We’re projecting growth. I kind of chuckled when you asked the question because it doesn’t seem like you can see very much into the future like you used to. I think we’re all closer to the news and we’re all closer to the stock market. It’s probably amazing how much our businesses follow the stock market in some cases. But we’re predicting growth. We try to do one year, three year, and 10 year plans. But with three year, you’re kind of lobbing it in the air. Unless you have a new product coming out that is early in the life cycle and has a huge opportunity. We look at finances about every six months right now and do want to re-budget, where are things, what’s happening. Do we need to change course, do we not? The economy is very busy. We’re very busy right now in manufacturing. In all three of our divisions. We don’t see that changing this year. It’s actually getting busier right now. Barring a catastrophe somewhere else in the world that could change things tomorrow for us. I think that cycle is so much different than what it used to be and you have to manage differently in this day and age than we used to. It doesn’t seem like you are able to hire a lot of employees way ahead because you don’t know what boat’s going to sink tomorrow, so to speak. • Even with that though, six month reforecasting is probably easier today than four or five years ago. • I would fully agree with that. It’s optimistic. • I was going to say we’re hearing from our customers, we’ve got a record year coming here but they’re already telling us that they’re looking at another downturn in 2017. So they’re predicting in 2017 we’ll start having a downturn. • Based on the overall economy or the specifics of your industry? • The specifics of our industry and development. Telling us, and then a lot of the big players who make the mills and stuff, steel, are saying they’re looking 2017 being another downturn. • Anyone else hearing that? Planning for potential downturns? • We talk about it more than we should. You don’t ever want to be pessimistic, but we worry about a crash now more than we ever used to. Because government, you know there’s a cycle of recessions now that seems to be shorter and shorter from historical times. So it’s a constant concern of ours. What’s changing, what’s going on? You try to be optimistic, but right now there are so many things out there right now, that we can’t predict. As you contemplate growth, is it based on developing new products? Is it based more on expanding your existing customer 116

group? Or is it something else? • It’s a combination. We have world expansion. We’re expanding in different markets. We’re looking at buying a new manufacturing company that is in different markets than we’re in today. We have product growth opportunities, and as much as we can, we do to gain more market share. So it’s an ongoing balance of which one do you have resources for and which one do you push. But you try to do it on all fronts. • We’re pretty much working on territory growth and also new product. That’s been our drive for many years. Introducing new products has worked for us.

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FOCUS GROUPS

Minneapolis March 11

Minnesota Precision Manufacturers Association

What do you think about the prospects for the American economy and how has that affected your forecasts? • We’d like to think that the economy is going to be robust, however if it is, we fear we won’t find qualified workers. The economy could take off and if we can’t hire people to fill orders that are coming in the door, what good is it to us? • We see expansion. Medical device is 80 percent of our business and projected growth is about six percent over the next year and aviation is the other 20 percent and that’s growing at about eight percent rate amongst our customers. • Yes, we’re planning for 10 to 15 percent growth. • For us, we’re finding that our market sector is retracting a little bit in the semi-conductor industry. I think too, for Minnesota manufacturers, some of it depends upon your mix of US versus international sales. For us, we have about 60 percent international and a large portion of that is in Europe and that’s not helping us at all. • I will echo that. The Euro is 1.06 today. A year ago, it was in the high 1.30s, if not low 1.40s. That makes our products very much more expensive in Europe. We don’t do a lot of work in Canada but that Sponsors: St. Paul Port Authority, Minnesota Precision Manufacturers Association 118

exchange rate has swung quite a bit to our favor. But someone mentioned qualified workers. We work with engineers. That’s where we’re finding a crunch right now. Given all that, how do you feel about the future of your company? • We’re very confident, yes. • I’d say we’re very confident as well. The niche area that we’re in has been pretty much a steady 10 to 15 percent growth and we’re projecting that same for this year. • I’d say cautious optimism. If you had asked me in December what I thought for our company, I would have said good growth. But what I’m seeing is the fall in the price of oil and the unpredictability there. It’s making me nervous. • Yes, the oil’s had a big effect on the metals industry, the steel side. Scrap has just gone to lows that we haven’t seen in a couple of decades. • Pretty soon we’ll be paying to have the scrap hauled away. • If you aren’t already. What about capital expenditures? Do you think you will increase, decrease or remain about the same in terms of what you intend to do with capital expenditures in 2015 over last year? • We’ve already started to buy some stuff. • We have not bought like we wanted to. Because there’s so much volatility with our customers. They have had no vision for the last two or three years, there’s no consistency, no predictability. I travel with my sales people and ask, “What do the next two quarters look like?” Can’t tell you. And if they can’t tell me what they’re going to look like in the next two quarters, it’s pretty tough for me to forecast that as well. • I’d endorse that, a hundred percent. • Yes, and I would too. • That’s the million dollar question, isn’t it? We had a record breaking year to the good in 2012 and 2013, we had a record breaking year to the bad and then in 2014, the first half was a wash; second half was great. The first half of this year is looking great but again, to what he said, we call our customers and ask them, “What do you think?” And we really can’t get any firm answers. • I’m nervous about oil. We make power train components, you know, gears, gear shafts, different things like that. And there is a fair amount of stuff we make that ends up in the oil field, although it’s not oil drilling per se. But with all that being said, again, back to the price of oil, other parts we make end up in agricultural equipment. The price of crops isn’t good. Those commodities aren’t good so I don’t know how much buying there’s going to be there. 119

• We do a fair amount of military stuff and that’s iffy at best. I don’t know. You just can’t get a feel. We’re cautiously spending money on things that we either need to replace or improve our service, things like that but for me to sit behind my desk and say, “Well, okay, we’re going to spend two, three, four million dollars on equipment this year,” I’m not doing that. If it’s really something we need that makes sense, then we’ll go for it. Does market volatility still inhibit your ability to forecast? • I’m comfortable with six months but beyond that I’m not. • If you’re a job shop like we are, then forecasting is really a struggle because customers are not helping you out. Even our best customers, who we can rely on for a constant stream of business, it’s like they’ll call us today and want something tomorrow. It never used to be that way. There used to be better communication. As a job shop and, of course, we’re a private labeler, so we’re getting on them and they say, “Well, we’re relying on our distributors that are major OEMs themselves through distribution.” So then they’re relying on the distribution to feed them the information and distribution’s reluctant to commit. It’s sort of a trickle down effect. Let’s go there. Are OEMs more demanding? Have those relationships changed? • No, it’s still, it’s still out there. • They would love it if they could call up and say, “Hey, do you have certain sizes in stock? Deliver it tomorrow.” They don’t like it when they call in and we say, “Well, that’s a six to eight week link time.” • I’ll echo that. • Pretty close, you bet. • Our customers are changing. We’ve got large OEMs that are now willing to carry more inventory because they want to be more responsive to the customer and have the product on the shelf and not miss their quarterly numbers -- which is a real shift because they, up until this year, they were much more, “You hold the inventory, we don’t want it until we need it.” But now they’ve substantially increased what they want at their facility. We can’t keep up with their demand. We haven’t been able to add capacity and workforce fast enough so there’s millions of dollars of backlog that we haven’t been able to realize in revenue simply because we can’t hire the people. • And our government is keeping more of our capital in taxes and that’s constraining our ability to invest and grow. • We used to get one year blanket orders from our OEMs and now we’re getting three months blanket orders. • We’ve gravitated from commitments to a rolling forecast. So it used to be a commitment of six months, month by month. Now it’s kind of a 120

rolling forecast every two weeks, four weeks and they’ll commit, maybe, to sixty days out. • Even at that, I’ll bet you must rely on historical data to help you with that. • I would love to have your problems where you can forecast six months. We’re about 45 days. We tell our parent company after that the satellite dish just doesn’t pick anything up. Experts used to commend the value of personal relationships in the supply chain environment. Is that less important today? • We used to think that we were going to sell value, quality, blah, blah, blah. It’s losing its appeal. Today, it’s price. We’ve even been asked to, when we’ve sort of thrown our competitor under the bus and pointed out the flaws and the inefficiencies and whatever deficiencies in what they were asking for in their specification, “Can you build that too, then?” • They can get that same quote out to 10 people and buyers today don’t want to be bothered with phone calls. When I tell my sales people, I say, “You’d better follow that up with a phone call. That’s a nice quote. We want to make sure we’re on top of it.” • “Yes, but Bill will get all upset if I tried calling him. He’s told me before, ‘Don’t do that because I don’t have time.’” • The expectation for buyers -- and I feel for them -- is, “Get it in, get it off your desk because I’m going to have you doing something else today. I’ve provided you with all these tools and the equipment but I expect to get a little more bang for my buck too by having you working with the freight people a little bit more.” • You might have had a buddy. He’s the guy that you depended on. You might have had two or three guys. Today, and I feel bad, because it’s technology driven but the same people who are doing the buying are coming from the same generation that are doing the selling and my people think they sell by email. One more thing that I got upset about twice in the last week was when my receptionist let that phone ring and nobody picked it up. She said, “they’ll call back.” You’ve got to be real nice when you explain to them you don’t want people to have to call back. I can’t fathom it and it happens, it just does, direct lines and caller IDs. • Yes, I think with the expectations that the buyer is -- you know the people that actually buy from us or from you or from anybody, what they need to get done in a day, they just don’t have the time to go wining and dining and visiting and talking about the kids and the snow and God knows what like they used to. • And I’ll echo what everybody else is saying too, to get these people on the phone, with caller ID and God knows what, they don’t want to talk to you, they do not talk to you, period. The guy that does the selling for me, 121

he’s got certain people that he can call because they will answer the phone, certain people he can only email because they won’t answer the phone. It‘s just ridiculous and it’s hard. • I think price always plays a big part in it but I’m not going to say that for us that it’s everything. We’ve had the arguments and the discussions and whatever you want to call it with different buyers on things and they’ll say, “We can get what you’re quoting a $100 for, we can get it for 50 bucks.” • “Well, go buy it. Don’t call me back.” So the manufacturer has to be stubborn sometimes also about that. If you don’t want to sell price, don’t sell price. • From the buying end, too, I can offer this perspective. A couple years ago our local chamber conducted a procurement focus group to gather local buyers together, to figure out how companies can utilize local companies, and buy local. I’m not a purchasing agent or a buyer, but I joined the group because I want to know what these guys are thinking. The group sort of ran out of energy. We used to meet every other month, now we’re just going to meet twice a year. • One of my huge takeaways in terms of emerging technologies or emerging best practices is the topic of auction bidding. And a couple of companies in Mankato are actually doing that. We don’t participate because I think it’s very dangerous. But that’s sort of trending. There was a lot of follow up discussion about how successful that is and should we be doing it? There are various companies looking at it and they want to understand what auction bidding is. It’s dangerous. • Oh yes. It works like this: a major supplier will have a preferred vendor with the criteria that you have to meet to become their preferred vendor. Then you get an invitation for an RFQ and then you go online and the specifications are online. You have this special password to get in. You know at least you’re one of maybe five other vendors, maybe three but I think it was very common that they kept it around three to five. So the idea is that at least you know that you’re not bidding against 10 or 15, okay? Supposedly, that’s supposed to be an advantage. But anyway, the idea is that they give you this window of time that you can post your bid and it’s almost like an eBay type thing. And you can see other bids. You don’t know whose it is but you have an opportunity to come in under and when the clock strikes 12:00 and you’re the low number, you get it. • I participated in one of those several years ago, where it was a big company had bought up a lot of smaller companies and I was doing business in Wisconsin at the time with one of the smaller companies. Well, they run this out of Ohio. They don’t know what the people in Wisconsin expect out of their shop and I won the bid and it was at a higher price than I was currently selling to people in Wisconsin at the time. 122

Let’s quickly talk about some other issues that create challenges for manufacturers. What about competition from foreign sources? • For us it’s a major issue. We have to conform to requirements and get an export license for our products going to many countries and we’re finding that, well, for one, it takes very long to get an export license. So that’s an issue when you’re in competition, when others can do it in two days. But we’re also finding that our government denies our export license, where other countries are allowed to sell that same country. How about foreign competition as an opportunity? • Very much so. We’re in aerospace. Boeing has dominated the North American market for years and years and years, including, Canada. Airbus is coming in like an 800 pound gorilla and basically buying capacity. So now, all of a sudden, other major players are coming in to our type of industry and saying, ”You’re doing work for Boeing, you’re obviously qualified to do work with us. We’re a little bit easier to do business with.” • And so it’s very much a Ford-GM battle in the aerospace market and there is no capacity. Last year was phenomenal. The year before that was phenomenal. 2016/2017 is going to be terrific. We already know it. So we’re building, we’re putting capital in as fast as we can in order to maintain because if you’re left behind, you’re out. So you either buck up or get out of the market. Airbus in particular is a very large push, economically, here in the States right now. • We’re definitely seeing it as an opportunity. Five years ago, our customers told us they were sourcing a lot of the product from foreign competitors and in the last two years, they’ve brought it back and we’ve received a lot of that business back. • I think it’s plateaued. I think they’ve abandoned their foreign sourcing strategy and are focused on their domestic suppliers. • What we see is the higher volume, easier stuff we’re still losing, from time to time and the lower volume, ungodly tough stuff is coming back. That’s what we see. What about the challenge of government policies and regulations? • This minimum wage thing could be an albatross. We’re getting squeezed on the inside with pricing, “Lower your price, lower your price.” Therefore, we have to be looking at our cost structure. So then we’re getting squeezed, it feels like, from the government to raise minimum wages and it isn’t just raising minimum wages, everything goes. Walmart is opening up a big distribution center and advertising what, $15 an hour starting wages? We get welders coming to us and saying, “Hey! I’m going to go and work for Walmart, drive a forklift.” That’s an issue. Because 123

okay, all of a sudden we start raising all our compensation. Can we pass that on? No. Now we’re talking about margin squeeze. • I don’t know. I’m curious to see if Walmart raises their prices to us or McDonalds raises their Big Mac, you know what I mean? • The same for us. And they keep changing and the -- we’re nowhere near Russia but we have to be cognizant of the laws, okay? So that’s one thing. Another example of [inaudible 0:41:59]. The amount of administration that’s going to go into that, especially this year because this is the year, is just astronomical and again, no one really has an answer. • What do you need to cover? And trust me, you think that should be an easy answer? • Thirty hours a week. Well, define 30 hours a week. Is that for your permanent employees that are on your payroll? Is it for the guys that come in and are cleaning your office building, that’s working for a temp agency or is working for a contractor? You’d better have proof that they’re getting health insurance because they’re on your premises for 30 hours. What are the prospects for employee-related health insurance? • Healthcare was always expensive in terms of covering your employees, but now you have the actual premiums themselves, the healthcare costs, and then you have all the fees on top of that -- and then you have the filings. You have the compliance. You have to document how many employees if you’re on the threshold of 50 or above and then dealing with contract hours, temporary workers, the fluctuation in your workforce with all of that. Contract worker employment has gone up because the agencies have provided insurance so then they pass that cost down to you as well. • I would say it’s worse and that it’s going to continue to get worse and, personally, I feel that in two or three years from now, the whole healthcare landscape is going to be totally different. You know, with the Supreme Court visiting and revisiting some of the stuff, Republicans coming in, Democrats going out, whatever that mix is going to be in the next election, who the hell knows what it’s going to be two years from now or next year. • Well, it’s changed the whole free market capitalism nature of doing business in the United States. For one thing, it used to be that you could use healthcare benefits as a competitive advantage to attract workers. Now it’s a totally level playing field. It’s no longer something that you can offer that you know that somebody down the road can’t. • Employees take it all for granted. • Absolutely, yes. • Of course, of course. • I guess it depends on the occupation of the employee. The higher up the food chain, the more sophisticated they are about that stuff. Construction workers are less concerned about that than, say, a factory worker that works 124

in a more stable environment, let’s say. • Most of them look at the wage per hour; they don’t consider the benefits. • In the last two years, we’ve just started renewing now, we have not passed it on to our employees. • I keep seeing articles in the media about healthcare costs are moderating and going down but we’re receiving a 27 percent cost increase on July 1st for our healthcare for our employees. And the employees want wage adjustments to offset that. We pass it on but that increases the pressure on the feeling they have about, “Am I fairly compensated? Because if you’ve given me a two or three percent wage increase and I’m facing a 27 percent increase in my health insurance cost, I’m on the receiving end of getting screwed.” • I don’t know if I’ve got an answer to that. We have to make a decision. We have the renewal coming up July 1 and we haven’t determined what we’re passing on and what we’re absorbing. It’s $290,000. • That’s a lot of money. • We’re one of the companies where ours actually went down a little bit. • You’re the very first one I’ve heard that from! Congratulations. • My agent came in and said, “I’ve got good news for you.” When he used to say, “I have good news for you,” that used to mean only a 10 percent increase. So this year, when he came in and said, “I have good news for you; your premiums are actually going down,” I was just about thunderstruck. But yes, they went down just a bit but I’m anticipating that’s just the one year flash in the pan and we’ll be right back at it again. What about the skills gap -- your ability to attract and retain qualified employees? • It’s a big impediment. • It’s 80 percent of the issues that we deal with when we look strategically at growing the business. • It’s our biggest constraint. We’ve been hiring continually for 24 months and we have openings that have remained open for that entire time because we can’t find people. • What kind of employees? • Technical skill, machinists and engineers. • There’re plenty of four-year college types out there. That market is full. • Not if you’re looking for engineers. • Not engineers, they’re tough. • You know, you can chase that wherever you want but a lot of it is still from the groups that come right out of the high schools. The high schools are not working on that. • We had a meeting with the University of Minnesota, asking why, when 125

they go get their Masters in something, whether it’s business, whatever, they can’t be told how many jobs are out there, what the starting wage is going to be, what the wage should be in 10 years, instead of having degrees and things where there aren’t any jobs. They should get very informative to the people who are going into school. And they don’t want to listen to that. • We run four-hour classes so people can go to work for six hours and go to night-shift or day-shift, either one, everything that we’re trying to do. But it might surprise you that they have to pass a test in verbal communications before they can get in there. • Some of it is generational. I think manufacturing got a bad rap as a dirty, dark area to work in. We’re doing a good job to change some of that. But I think some of it, too, in 2008, 2009, the recession kind of perpetuated that image, is that people get the four-year degree and get the management jobs and that type of thing. The minute the lay-offs and things get bad, they keep their jobs. It’s the technical people and the rank and file that get laid off. • And I think there’s a generation of people who saw their parents working for companies for 40 years and giving it their life and then things get bad and they’re just shoved out the door. And so they’re thinking, “I don’t want that kind of a job. I want to work someplace where I’m not in that pool where I may be just shot out the door.” • And I think some of our loyalty problems, where people are jumping, either chasing the dollar or chasing whatever, not working for companies for a long time, because they saw their parents have that not pay off to any degree. Are high schools still a challenge? • Dakota County is getting pretty proactive in assessing the work skills job gap that’s going on in their local area. It’s just getting started but it includes the colleges and the high schools and the middle schools and the local businesses. • And one of the things that we’re starting to flush out from here is part of what I just heard here, is the misnomer that our high schools are promoting this. Our high schools aren’t promoting any type of counselor ability because that was cut back 10 or 15 years ago. And your high school counselors, typically, are in that ratio of 1 to 600. They don’t have the ability to get in and sit down one on one and talk about career placement that we may have had 10 years ago, 30 years ago when you had somebody there. • If it comes out of a discussion, an article or some type of classroom area, it’s going to take a long time for it to click to somebody that’s texting during that class or has something else going on later in the day. • If it’s something that continues to be brought forth within the 126

community, in homes, churches, social groups, all of those areas that talk about a journey in manufacturing or a journey in what you’re passionate about, not even talking about manufacturing because as we understand, the career opportunities you have in your companies are significantly different than assembly, which is what most people think of manufacturing. • Yes, and dirty assembly. That’s what we talked about before. • And I think that grassroots campaign is going to go so much further because when they start seeing the benefits of where they’re headed and from a peer group perspective of seeing what happens in comparison to the fact that every kid, his junior year in high school, is getting pressured about deciding which college you’re going to go to, not an option about what are you going to do after you graduate from high school but what college are you going to go to? The peer pressure, the peer exposure and the grassroots campaign is really going to be not an easy fix but the simple fix and it’s going to take a lot of work.

127

FOCUS GROUPS

Plymouth March 13

MRA

I thought we’d start with the whole issue of employees and employee relations. How worried are you about the specter of an aging workforce and how manufacturers are coping with the rise in retirements? • We don’t allow anybody to retire. • (Laughter) • Finally a solution. Simple and clear. • It’s really a challenge. It really and clearly is. A great number of people at our company are nearing that age. And fortunately for us, most of them have been continuing to work through the age of 70. And some, I think, beyond. We had one person who was 81 years of age before he finally retired. He was a great guy. He loved coming to work. But we’re finding a lot of our skilled folks want to transition, so we’ve tried to put programs together allowing them to do that. We have one person, for example, who’s from Europe. He’d been with us a number of years, highly skilled, highly knowledgeable about the industry that we’re in, on a grand scale. He was delighted to find out that we would allow him to work five hours, to four, to three, to two, to one until he was finally done. And that for us, of course, allows us to bring somebody in, and train that person. We’re doing that in several areas of the company today, as a Sponsor: MRA 128

transition time for the retirement. It works quite well. Everybody seems to win out of that scenario. The person is allowed to keep making money and still add value. They feel good about themselves. It’s important to our organization as we’ve found that relationships with customers last forever You keep that, you keep those customers. That’s really important to our business. • That’s the other part of it. That’s a big, big problem for us today. • I don’t think we have anybody older than 55 -- including myself, thank you very much. • I’d be more concerned with the economy going so well, the more you push some of these people to say, “I can’t believe he’s still working there. “My 401k’s back, my stock market’s back. I don’t need this.” • We’ve grown fairly. We’re at a point now where about 80 percent of our workforce has less than two years’ experience with the company, and we have a very unique product, very unique processes in a highly regulated industry, so it’s a real challenge for us. Those guys who have 25 plus years’ experience are worth their weight in gold for us. I have made accommodations for a few of the people. I’m willing to go to reduced work weeks, and things like that, gladly, to keep them there and transfer their skills to the next generation of people. Before I started, we did not have a manufacturing engineer in the organization. We had a technician who was very skilled but didn’t necessarily think like an engineer, and think about process sheets and keeping track of process data and that sort of thing. So I’m actually up to three manufacturing engineers, and those are people that I want to also get those skills to take that on. So I’m trading up in skill sets to get people who can “proceduralize” a lot of the stuff. What about the kind of internal training and education. • Part of what we’re seeing is what we’re referring to is a talent development engine. It has three major pieces. One of them is the best practices -- in our heads we know what to do but sharing it with somebody else or making sure that we all do it the same way is the first challenge. The second part of the loop of that engine is we have to teach it the same way. So that we take a best practice and we transfer it to as many of our colleagues as is appropriate. And then, applying the best practice, they essentially figure out ways to improve it. Because every best practice is only best right this minute and then it gets better. You’ve got this loop going between document the best practice, teach the best practice. Then the third piece is communication. It is important to capture these things. So that’s a base level of the development. You move up to the top level, which is the leadership teams and the way that they motivate and articulate the vision, the strategy, so it’s a very broad range. 129

How steep is the curve to manufacturers to formalize this kind of planning? • Everybody understands the importance of planning. Planning is best done in advance. • (Laughter) • But the trick is involving more people and thinking further out. And that takes time away from making parts. And that’s the tradeoff that we have. • We recognize the need for best practices all the way up through executive level for training in leadership skills and that sort of things. We started some formal training programs for supervisors. Are they adequate? No, not yet. But we’re also a company that is third generation, a familyowned company that has gone from a small shop where the chief executive can do everything, can manage everything, to where he needs to have people who can manage the business. So we’re going through those pains as well. • The mid-tier management is key. I mean you shouldn’t have to have people retire to understand that you need to formalize processes and so on. And I think when you have people who have been in their roles for 10, 15 years, when you try to get that culture change it just doesn’t happen unless that person is able to change their game. You can say train really all you want, but it doesn’t matter if it’s not embedded in your culture and not able to be executed by your middle managers and your head of ops. It just didn’t happen in my place until I hired a VP of Ops who knew that culture, could lead that culture, and was passionate about it. It was just lip service up to that point. • But it succeeded? • It did, but it took somebody coming in who hadn’t been there for 10, 15 years to identify the types of people that we needed. And then not to do it just Monday through Wednesday, but to do it the next week and the next week and write people up and pound it every day until it’s ingrained. But it didn’t happen until I made changes. • We invest a lot of money in our training programs. It’s very formalized. We’ve developed our processes over the years to be sure that people know how to do things and do it the same way consistently. But we spend a lot of money every year. It’s top down, everybody’s going through training, all of us. We’re always trying to promote people from within the organization. And the only way a person has that opportunity is if you give them some training and education. We even have a thing called (name of process). And so all new employees go through (name of process), it’s about a 14-week process. But we tell them about our customers, our finances, how we make their money, who our customers are and why they’re important to us. Why their role is important to the organization. So it’s a very structured program. • I would say with the numbers that I work with on their training 130

programs, usually when it’s internal, skill based, they’re doing it themselves. But we may step in help with a skills gap analysis, or something like that. But then the ones who are using us for the soft skills, like communications-based training, project management, supervisory level training, we usually sit down with them and identify where their needs are and put together a year-long program with them. It might be called a Management Essentials program. Those are the organizations that we see increased production in, because they’re investing in those employees, they have a lower turnover rate, higher retention, and they seem to be able to recruit people because they’re so willing to make that investment in their employees. • Do you find an increasing acceptance of the hard value of soft skills? • Yes. I mean it depends on the culture of the organization. But if I look at my members, I have more of them coming to us, looking to make that investment than ever before. In my five years of being here. • Well, and increasingly this year. The market’s gotten better. We’re seeing people leave whom we thought would stay forever -- because the opportunities are there. Folks are getting a lot of inquiries and a lot of commitment from organizations to say, “Ok, just being good at the technical sort of skills isn’t enough anymore. We really need to be creating an environment, building the kind of culture that’s positive for our workers and all of our employees if we’re going to be able to retain people.” So it really becomes a retention tool to help assure, not just technical skills, but also that you’re building that kind of internal brand loyalty, culture loyalty, through a positive work environment to be essential in retention. • The quick add-on to that is it drives employee engagement too. So the more engaged the employees are, the more productive, the safer the work environment, et cetera, et cetera, so it all ends up being interconnected. • I’m glad you brought that up because that’s actually one of our major efforts this year, and last year as well, is working on our culture -- how we relate to the company, how we want everybody to feel inside the organization. It’s company-wide actually. We work with everybody inside the company. Now mind you the huddle meeting is about 15 to 20, it’s our managers, it’s our leaders in the organization. But when we do a companywide meeting, we’ll print it up on the board as well. This is something to think about. You know, be respectful, I’ll just use that one because it’s top of mind. What does that mean to us as an organization? Why is it important? It’s very important to our business and we recognize that. And it’s really something we’re working hard on this year. Sometimes we work so hard making sure the person knows how to run the machine, we don’t think about the fact that they need to know how to work with people. It’s not just running a machine, it’s about working with others. So it’s a really important thing. 131

Some people have talked about the challenge of finding people who possess a basic work ethic. Someone called it “alarm clock” issues. Still a challenge? • We go from one extreme to the other. People who have been here more than 10 years or less than two, trying to keep that group. Now we’re talking about simple things like drug testing to find people. I’m totally dropping it, but I can’t find people. And now you start talking about workers’ comp issues and it’s a nightmare. And now I’m really concerned, but I’d like to tighten things back up again but now we come into the spring and construction and landscaping and all these better paying jobs for three or four months. The younger group is running to wherever they make money and there’re enough jobs out there that they can actually burn bridges and find something else later. We lost people to the oil rigs too. So we’re trying to reference, we’ll pay you 50 bucks if you find somebody and if they’re still here in x number of months we’ll pay you $200. Do you have brothers, sisters? A lot more women in our workforce than ever before. Now it’s a real challenge and that’s not even talking about trying to load up a second or third shift and the dynamics of that with bigger premiums and so on. The hard part is all these training things are fantastic, but it’s terrible to say out loud but how much am I going to invest if I don’t know if they’re even going to be here a month? So that’s the biggest challenge. And so where we can automate or try to get some efficiencies? We try to do that. But at the end of the day we still need four people at each machine and they all have their processes. We’re trying now to just not break up the team. When people don’t come, the biggest complaint was, “Now I got Frank” or “Now you gave me Jimmy.” It’s like, well then, try to keep your four people together and you won’t get Frank or Jimmy. • (Laughter) • Not that Frank or Jimmy are bad, but there’re four people who are operating like a pit crew at a NASCAR thing and when one person’s sick you just don’t get to shut down a machine and you three go golfing. So the attendance, we put attendance points in place, we almost had to take that back because we lost about 15 people in a matter of six months. We just said we’re either all in on this attendance thing or we’re not. And again it’s a culture change. Someone came in 15-minutes late for an interview yesterday, and we just said, “No, have a good day.” It’s like if it’s going to start at the interview we might as well skip the pain and suffering. What about the skills gap. Still a problem? Growing? And what is the single biggest point of your biggest nervousness? Is it about entry-level employees? Is it about employees with technical training? Is it about four-year college employees? Where’s the biggest challenge? • All of the above. 132

• Finding good entry-level people. The ones who come to work every day, on time, are not common it seems. And good entry level people with the desire to learn the skills that are necessary. • That are career minded. You passed attendance and it’s nirvana if they actually want a career. • Yes. • Exactly. And want that career and want to develop those skills in order to get into the higher paying jobs. It’s difficult finding those people. We go through quickly. • It’s difficult for us. We have highly technical machinery and it takes a skilled person to operate the machine -- and we can’t find those people. We bring them in and train them and that’s the risk, right? And you don’t know what’s going to happen. The only way you’ll find them is if you train them. There’s no one coming out of the trade schools today with these skillsets. That’s our biggest worry, actually is where do we find these folks? How do we get our education system really to understand the need of manufacturers? Manufacturing has good wages, good benefits, can be a great career for someone. But kids in school today, they don’t know about it. They’re not finding out about these opportunities. It’s not interesting to them for a variety of reasons. And I think we have kind of lost that. And for our organization, as I try to expand manufacturing operations, because that’s what we would love to do, my biggest problem is finding somebody who can actually come in, knows what farming, bending, tolerances, all of those types of practical things are to do the job. So if you have to train them, it’s a four- or five-year process. And that’s a challenge. The business is growing and I can’t invest more money in machinery because I can’t find the people that I need to. Invest money in machinery so we can continue to grow the way we want to, to serve our customers. So I don’t know the answer to that problem, other to train. To recruit someone who has no idea what this is and hopefully bring them up to the level that we need. And that takes a long time. I’d love to be able to hire someone. I’ve been looking for five years to find a person who has the same skill level of a man that I have to replace at some point. I think the only reason he’s still working today is he loves his job so much. He doesn’t really need the money. He could leave anytime he wants but he loves his job. • The career track is where I’m trying to push people to now. It’s the next stage because we have competitors that say come to our place after we’re done training and we’ll pay you a buck more because they know we’re a good, not a training ground, but we do a lot of things right. So they say, you have to try to work with these guys. You know, don’t chase the dollar or dollar and a half. So, I think it’s just trying to give them a vision that there are stepping stones, and not just the first one because that’s kind of where they seem to stop. 133

How do you assess the economy, from a prospective of planning and forecasts? • Our growth has been entirely international. It’s stayed the course domestically. All of our growth and capacity increases have been to satisfy international demand. • How has the dollar affected that? • Yes, so the Canadians aren’t buying. • (Laughter) • The strong dollar does a lot of great things -- you can buy things cheaper overseas. It also means that when we sell our products overseas it’s more expensive. So it’s a double-edged sword. Recently, when the dollar was weaker, we had a number of our overseas suppliers raise the price significantly because of the exchange rate. They weren’t making as much money. So our costs went up a bit. But really, it’s great to have a strong dollar, from the standpoint that you can buy things cheap. But when you’re international that can be a problem. What we try to do in this is we try to focus on “what’s our value add for the customer?” Which I’m sure everybody else does as well. I don’t know, it’s hard to watch and if you make that a part of why your business isn’t really trying to work, or be as successful, then you’re looking at the wrong thing. Because that’s always going to be a problem. There’s always going to be an up and down. Currency does this all the time. You have to understand that’s just part of it and hopefully your timing is about right when you buy something or when you’re trying to sell it. But, what we try to do is just put ourselves in a position to be the most value add and market this for customers we’re serving. What really is probably, we haven’t touched on this yet, but I think all of this really comes down to – we had a company-wide meeting probably a year ago. We took a dollar bill and we glued it up to this size. And we asked everybody in the company, “How much of this dollar bill do you think you paid in taxes?” We pay 53 cents out of every dollar we make in taxes, 53 cents. We just cut away half. So do I worry about where the dollar is? Not really. It’s going to be where it’s at. We just have to make sure we’re priced right for the market and that we’re adding the right value. What really kills us is the fact that you can’t stop the taxes steamrolling us more or less. And when you go to a customer and say, “I need to charge more money because our taxes are going up, our compliance and our regulatory things that the state and federal government is asking us to do.” Which is quite a burden on our business. All of those things are costs for our business. Very high costs. And that is very tough to overcome, as hard as we work and we find lots of ways to improve. And reduce our costs every year and we can’t keep up. So it’s a challenge for us. But for the strong dollar, I love it when I’m buying from Korea, it’s terrific. Buying from China is terrific. It hurts me when I’m trying to sell into Europe. We 134

sell product in China as well, so you just have to find that rate, that right value of the product and why the customers are buying from you. As you factor all of these factors into your projections, are you going to grow this year? • Yes. • Love to have 10 percent. I would love to have 10 percent. It will grow at the rate, really. What’s the economy running at right now? • About 3 percent. • We’ll probably run a little bit better than that. It just depends on the customers and what they’re doing, what opportunities we run into. We’ve been in business over 36 years, and we’ve had customers who’ve been with us for 36 years, so we have a certain run rate anyway. And then what you’re trying to do is spur your business with new customers and/or new markets. That’s where we really get our growth from every year. And regardless of what the economy does, we’re going to do these types of things. So we don’t worry about that. But what we really focus on is what markets can we go into? Are we selling the right product for those markets? That’s going to be the challenge. • Where do I see the economy going? You know, it’s going to continue to grow. There are going to be market segments that are not doing so well, for who knows what reason, but that’s just a constant. Unless there’s a catastrophic event this year or next year, which could be war or whatever, I don’t see anything really that’s going to throw us off course for a while. At least in our marketplace. Everybody I talk to in manufacturing, now the problem is where’s open capacity? • Our biggest challenge is how do we manage growth? We don’t exactly have a lot of competition looking over our shoulder at all. But we have to make sure we don’t have a lot of irrational exuberance. We don’t want to hire 30 manufacturing people and then a year from now say, “Sorry.” So that’s what we’re challenged with. How do we grow? How do we keep our supplier – it’s both our supplier and our customer – happy? • I’ll be really disappointed if it’s less than 12 percent growth. I budgeted 15 percent and hopefully it’s that and then some. • I’ve really tried to cut back on the contract manufacturing and trying to get more proprietary because it’s more enjoyable for one. • (Laughter) • And we had to change our rules for some of our customers on larger run sizes, so we’re not doing so many changeovers, because I don’t have people to do a bunch of changeovers. Luckily with the economy improving, no less than 40 pieces per run. Which some of them aren’t very happy about because we run big parts. So we’re trying to push more into the proprietary and controlling our own destiny in there. We have the four 135

LLCs to complement the seasonality. International growth is great. We’re shipping big parts over to Russia, Sweden, and Norway. • We’re right on the cusp of making that decision of moving to a second and third shift. I’m just driving efficiency projects rather than trying to – the easy answer is yes, we’ll do a second and third shift. But how do I supervise that shift? How do I make sure I’m getting good quality product out of there? • You almost get to the point where you do end up buying more equipment because you can’t imagine staffing second and third, you just have another machine to run on first. Which in a very capital-intensive business it just doesn’t make sense, from a business standpoint. It’s never been taught that way. Let’s talk about shipping and logistics. Are they becoming bigger issues? • I was just going to say, we should talk about freight. • Well, probably not a good topic for Enterprise Minnesota, but I need to get into the southeast. We make big parts, and I need to try to find some way somehow a small little plant in North Carolina, South Carolina, Georgia, northern Florida. But yes, freight’s a killer. I don’t think we do a good job buying freight. I mean, I don’t have a logistics department. Plus I’m getting counter billing and anti-dumping tariff penalties from 2010 because I’m bringing in aluminum that I didn’t realize didn’t meet the requirements. So that’s been a really good education. Since we didn’t have logistics departments and our vendor is not telling me you can’t bring in their stuff, so that’s been a new challenge I’ve never been faced with before. • So that goes back to? • Yeah, they can go back to 2010 if they find that you’ve been bringing in aluminum that’s not a finished good and it’s a component that you’re adding to and it’s a 6 series grade aluminum. Yeah, it’s been really educational. And then the penalties and the tariffs going back for four years of everything you brought in. • Which probably wasn’t a rule in 2010. • Evidently it was. Yeah, I didn’t know anything about it. I don’t mind making mistakes when I can look back and say I made a mistake. This one really bothers me. I don’t know how I would have known. And other huge companies are going through the same thing, I guess. • Wow. • But, no, I think the freight is as important as a purchasing manager is to, I think, everybody’s organization. That is just key to your business when they’re spending the money they are. I’m thinking the next one I need to think about so I don’t have any regrets, is somebody who is a professional 136

in logistics, and shipping and freight. I think that’s probably overdue in our company. To make sure I’ve got competitive rates. Someone who’s just shopping. Their customers can go out and find cheaper rates than what they’re charging, but they have a little more passion for it than evidently we do. Huge. Huge challenge for us in Minnesota to try to be a U.S. competitor. • Freight is continually rising for us. Just freight seems to be a non-stop growth as far as cost. So, it’s a challenge. And I think it’s been that way for a number of years. It doesn’t seem to matter how much money we budget for our freight -- it’s not enough. • And try to understand their bills. I said to my accounts payable person, “I want to know more about how they charge. You know, what this surcharge is.” I said, “Dig into that. Have passion like I would on that. Just find out more about how this industry charges stuff. And not write off the check and figure out, but when do I see that recovery too?” • Most of the people who work for logistics companies that draw up those bills come from Comcast and AT&T. • (Laughter) • My purchasing manager says, “Oh, it’s just part of the cost.” So he doesn’t understand the cost at all. I don’t believe it’s a huge part of our cost structure because most of our suppliers are local, as in Minnesota or the tri-state area. For the large majority of our stuff that we buy. And then most of what we sell flies away under its own power. • I’d say you probably have a fluent customer base too, where it’s probably not as concerning. • The interesting thing about surcharges is they’re not regulated. So every freight company can, several different freight companies, charge a different surcharge level. It’s just who they are. So, “How’d you come up with that number?” And they kind of just guess. “Well, with the price of gas, shouldn’t the surcharge go down?” So that’s the question, why didn’t it? “Well, there’re other factors involved in our surcharges and the cost of gasoline is only a few cents a mile.” Very interesting. So they all have a different formula that they use. So it’s not regulated at all. Let’s get through some other issues quickly. How about the enduring costs of providing healthcare coverage to your employees? • It’s not better. Costs go up every year. We’re self-insured. We just see our costs go up every year regardless of 15 healthcare programs and all those things. It’s just never-ending. • You just build in the increases on the plan. • Every year it’s the norm. Every year we get the same story. Healthcare costs are going up and it’s going to cost you 10, 15 percent more. It’s increasing. We haven’t passed it on to employees at all. 137

What about employee related costs that aren’t related to providing health insurance, like wages and other benefits? • Workers’ comp is huge for us because of the new workforce and the quality of workforce and so on. And I think those of us who have been running businesses for so long, insurance and medical, it just doesn’t even phase me anymore. It just goes up and goes up. It’s just an expectation almost. But we’ve changed medical providers based on the last question. I’ve really shopped two or three people to get creative on making sure I don’t just renew it 10 percent, renew it 10 percent, renew it 10 percent increase. I’ve changed providers twice in the last four years. I might even this next time. They’re getting so comfortable just renewing, and I’m not comfortable just renewing. But workers’ comp is just huge with the turnover of our new people, sloppy, just not caring as much maybe. That’s probably the biggest one for us, is the turnover cost and increasing healthcare cost. We’re just trying to hold the line. We’ve been able to keep it under 10 percent or less. Just being more creative. We’re pulling people off of a different pool and HSA. The only thing that comes to my mind, like I said, is workers’ comp is constantly climbing. Finally, let’s talk about supply chain relationships, customer relationships. • I guess I don’t think that’s changed a whole lot. I mean when it comes to space, I think that they’re trying to make sure they’re only buy what they can take and consume quickly. Because no one wants to give more space. So I think that’s a constant fight. But I think the expectations are the same. The hard part is that we’ve got to keep pushing the envelope even if they aren’t asking us. You know, what was five days trying to get to three. Three getting to two and saying, ok, that’s enough. Let’s go work on something else. So, I don’t see the customer’s demands being so much as pure price. • Yes. I mean, clearly, you have to think about value add. What’s happening today, of course, with everyone carrying cell phones, and you’re in an age where you expect an instant answer. So, “When can I get my product?” “I’ll have to get back to you.” “No, I want the answer right now.” So you’re always trying to reduce your lead time. And with supply chain, you’ve got to do the same thing. Got to work through the supply chain so that they’re strategically aligned with what you’re doing. So they understand that I have to have the parts from you that used to be I could wait eight weeks. I can’t. I have to have the parts within four hours. Because I can’t build a big enough warehouse to warehouse all the possibilities of what the customer might call for. So you have to be able to turn on a dime, because I have to turn on a dime. And that’s how it works. And then you’re focusing on how do I continue to improve my operations? What equipment do I invest in? What equipment should my suppliers 138

invest in so they can help us? And can they help us? And are they willing to align themselves with us strategically. So we’re constantly trying to figure out how to cut our costs. That’s a real challenge. But in the meantime, that’s really, really what it’s about today. Our customers don’t carry much inventory because we’ve kind of trained them that way. They don’t need to carry a lot of inventory because we’re responding in seven days or less. And for most of our OEMs that’s fast enough. If their customer’s target, for example, spent a lot of time making a decision on what system they’re going to put in, but once they do they’re going to put in 20,000, 30,000 units, and they’re going to do it over a two-year period of time. • But the supply chain has slowed down because of what we’re all saying. When there’s prosperity and growth, there’re longer lead times for that whole supply chain, so if you don’t have suppliers that are going to – I talked about my issues about adding another machine. Well, if I don’t, my lead time is increasing and my customers’ lead time is increasing. So, when times are good, some of these companies, I don’t blame them, they’re just happy with where they are right now, not increasing capacity or anything. So if you have suppliers who have a quasi-monopoly like we do with some of our supply chain for resin, for pulverizing and coloring. That’s just added two to three weeks for it because they’re busy and they’re growing and they really don’t have to expand. • Also, our customer A, we’ve done business with customer A for a long, long time and they pay a certain price for using your machinery. Customer B is coming in and saying, “I’ll double that. I want that capacity. I’ll pay twice what Customer A is paying you for that time.” Customer A is out. • Just like that. (Snaps fingers.) It’s that phenomenon that’s happening right now. People can’t find employees and they want to invest in the machinery. But if I do, how am I going to run a second, third shift? And if I do, can it continue to run? So those are some of the decisions points you have to make. Or do I sit back and just profit from being able to make more money and take it easy for a while? • Well, I’m being cautiously optimistic. Because people got burned five years ago and people have a long memory, saying “Oh, I don’t want to go through that again.” So you hate to invest in all that infrastructure and have the rug pulled out from underneath you.

139

FOCUS GROUPS

Elk River March 13

Elk River City Hall

Let’s start with the economy in general. Do you see the economy growing or staying the same or constricted? • Our company falls when the economy dips. It’s basically as straightforward as that. If we all had a crystal ball to see where we’re at in two to three years, that’d be fantastic, we don’t -- right now, I think, not only through our vendor base, but through our customer base, everybody is growing. Everybody seems to be talking about record years. That’s what we have to base our -- basically, we’re following suit with theirs, as well. Business is good right now. Will it be that way in 12 to 24 months? I hope it is. The economy factors I think right now indicate that there is stability there. What’s past that, I’m not sure. • We have a little different scenario going. I think the economy-- most of the surgeries that our products are used for are elective, unless it’s trauma related. We do see the economy has a big impact, maybe not as much as industrial clients. The orthopedic side of the business is growing rapidly, mostly because it’s still coming out of 2009. It’s taken a long time for them to get -- they basically have really pulled back on the designing, back in 2009, 2010, and then Obamacare and the unknowns that had to do with the industry. They held back really just not investing in new product and now they’re launching all en masse. At the same Sponsor: City of Elk River Economic Development Authority 140

time, there’s a lot of consolidation in our customer base. You have the big boys buying the big boys and at the end of the day, you’re either on the in or the out and so far we’ve fortunately been on the in and so, we’re not so fortunate all the time. We’re seeing rapid growth because of that consolidation of vendors. • More than 10 percent this year? • This year, right now just first part of this year we’re 50 percent every year. The first half of last year was slow and so if you look at our combined business, we’re about 10 percent year over year, the end of last year growth, but certain parts of our business grew 30 percent, and other parts of our business. So, legacy is down, but some parts of our medical are way up. And a lot of that’s consolidation. So, the smaller organizations are going to feel the pinch of that as that consolidation happens because as I was mentioning, we had one of our larger customers in yesterday and they said we have 5,000 vendors, you’re one of the 52 we’re consolidating into. So, that’s a lot of companies that aren’t, right? So of course, that scares me when we’re at 50, year over year and what that’s going to be like. There’re some major challenges there as a business. • Over the last three years we’ve been in that eight to 15 percent range. We’re on base right now this year, our target is nine and we’re exceeding those numbers. • That will be our target this year between nine to 10. • We’re typically the majority owner in our companies, but we really review it as a long term partnership. With ownerships a lot of times, we’ll invest alongside the current owners of the business like joining the board. A lot of times in succession situations, so our portfolio, as I mentioned before, it’s ten companies. Last year was a phenomenal growth year and this year that’s continuing, knock on wood. • Across the board? • Really across the board. You made a comment earlier about the economy being the driver. I think it’s pretty hard to think about that, especially with the amount of stimulus that was really dumped on the fire here over the last several years. I think what we’re starting to see is a lot of that is starting to really catch hold and people are starting to get more comfortable and confident with purchases that they’re making. I think we’re seeing that really across the board. We do have some companies that operate more in the industrial segments and then others that serve municipalities and we do see some improvement on the municipal side too, where I think a couple of years ago, there was a lot of concern about municipal related business. I think people have started to develop more confidence really across the board and we’ve seen that. Obviously, some businesses more so than others, but it’s really been a great run the last 141

several years. If there’s one impediment to growth, what is it? • Just people, machinist is ours. That’s the number one. We could grow 100 or 200 percent this year if we wanted to, if we had the people to put on the machines. • Is it you don’t have anyone to draw from, or the people that you draw from aren’t good enough? • Both. So, you can’t find highly skilled, well trained workers because everybody’s going after that same resource. When you do get a Level 1 individual, they just can’t come up to speed fast enough or there’s a lot of struggles in there. • That’s absolutely the challenge. We can flex other parts of our business very rapidly, but that’s the one that we really struggle with. We’ve hired 35 machinists in the last six to eight months and I bet we could hire another 35. We probably have 12 or 15 openings right now. • Where do you find applicants? • Other companies. • I think we have nine temp agencies working for us in a consortium to find those individuals and you can’t find them. We pay bonus structures, if our employees can bring somebody on, that’s a Level 2 or Level 3, they get a $5,000.00 signing bonus and you still can’t. • I think the mid-range, the technical trained folks are the most difficult to get ahold of. The entry-level general worker is very difficult to find right now as well. I think anybody will -- it’s just common knowledge is what that is. • And engineers are probably the next, right -- the quality of engineers and manufacturing engineers, good ones. They’re a little less immediate need because you can make your salaried people work more hours. I guess that’s one way to look at it and one goes a long way -- a good one goes a long way versus a machinist. If you don’t have a person on the machine it’s just sitting there. The capital is not the issue; it’s generally people in front of the equipment. • And where are the tech schools in this equation? • Way behind and part of that is -- I have boys in seventh grade now and they’re starting into the technology a lot more, but there’s a huge gap that we have to close. That’s happening, it just can’t happen fast enough. There’s a pendulum swung, will it swing back? I’m sure it will. Right now, it’s not fast enough for us and I know a lot of our competitors. We have a facility in Memphis as well and it’s no different down there. In Memphis, there’re a lot more people available, but they’re not trained. And you’re taking the same grouping of -- but you have a lot of liberal arts kids looking for work. We’re the problem here. How many of us 142

have told our kids, go on to Biotech? Go get a four-year degree. That’s where your opportunities are. I’ve said that in several meetings of this nature. As those people get more in demand, the pay structure goes up for those positions. I think people will find out that we’ll see that transition. I think the market’s going to bear those quality positions of the machinists. It will take it five to ten years, but I think we’re going to see the trend back to that. That is a respectable position to have. And we’ve lost a little bit of that in this country. • You’re going to have the staffing or the technical levels continue to grow through the tech schools and colleges and just in general and the apprentice programs that are happening within each of these companies, we’re literally trying to figure out how to grow our own at the same time as we’re partnering with Nova Tech and others and so we’re trying to do all of that. At the same time, our machine tool guys are hearing the same thing, right? What are they trying to do? They’re trying to make it so that there is nobody needing to be in front of that machine. So, all of that automation, all of those other technical advances are happening at the same time that we’re putting in a pool of people as fast as we can. That will meet at some point in time. • We already pay more. You can’t find the people and I think they’re starting to get smart too, where they don’t want to jump all over the place. As some point in time, it’s enough money for them. And we literally have guys -- Memphis for example, we had a gentleman where we paid him a pretty good salary, they came in at $45.00 an hour to try to take that individual away from us and he said, I’m just fine here. So, I think it’s a lot about making sure you have good benefits, good profit sharing, good things like that, we can afford as a larger company, but also then, just take care of your people. Treat them right and money will at some point in time get in the way, but most of the time, it’s not paying more, we just need more people. • How much are retirements making this worse? I don’t think it’s that big of an issue. It’s going to be I think further down. I look at, I’m just thinking through my group. We have a few people that have retired in the last couple of years, last year, but it’s not that impactful. One person retiring versus 15 openings. The percentages aren’t as big of a concern. • How about their institutional knowledge? • So, it’s medical, right? They have to have it on a piece of paper. We’ve sort of fought that battle. So, we still fight it periodically, but for the most part, the processes have to be on paper, it’s got to be documented, it’s got to be pictures, and that’s part of our training program too is bringing people on faster and to have all of the stuff very well documented, so that you can move it through. Getting it out of their heads, that’s a couple of years ago. 143

• I hate to say it, but the younger folks are more adapted to learning that than the older generations. • I think the younger population brings the different perspective to the different technology that’s going on. I think you have a lot more options because again, the retired, their mindset I do this and this and this, whereas, you get the younger generation and they say, why don’t we try this and so they’re more willing to utilize different options. • People that I’m talking about are closing in the last year or two of retired. You still need your experience. You still need those 20 years in that industry to be truly the key people, the go-to people in that particular department. Where are you finding the future leadership, the next generational leadership in the company? Is that on your radar at all? • Yeah, we just kicked off a leadership development program this year where we basically went through and said these are the key attributes that we see as a leader and then the president of each company is selecting one or two individuals that will then go through a whole series of course work and development over the next few years as the heir-apparent so to speak, but it might necessarily not be for my role, it could be for another acquisition, or other opportunities down the road, but really we’re just trying to drive another level of leadership within the organizations. Taking that to every level within the organization right? So we have the backfill all the way down into the -• So it’s formalized -- the whole process. • It is now. It was probably in each individual business, but now it’s across the whole organization. What about soft skills issues? • We teach it. You’re going to have some more stature, can you teach that? Probably not. Maybe you can direct it a little bit, but as far as how they work with people and how they communicate with people. If they’re a part of that group that you’re looking at, they probably are already there or they’re probably at least going in that direction. I think you can mold it a little bit better. • I think we’re just going to communicate by text and we’ll never talk again. No soft skills. • There you go. • We’re seriously thinking about eliminating email after noon. I’ve threatened a few times, absolutely. In fact, I make a point of not communicating through email. I get up and I go talk to the individual. We’ve just got to get back to that because then all of a sudden you’ve got 30 people on email and before you know and it’s going nowhere. It 144

happens out there. How about the challenge of providing employee-related health insurance? • Who knows where it’s going to be and when does the Supreme Court make their decision? Honestly, I think what we have is going to be pretty similar to what we’re going to see in a couple of years. I don’t think they’re going to pull anything away. Again, I’m not an expert in that area. We’ve started the trends where we’re going to be at. My concern is not healthcare costs. Mine is more competition for the same people going into your plant. Really, that’s where our cost drivers are. Healthcare is always a concern. • Is it something that you’re just going to build in 15 percent or something? • Yeah, honestly I don’t worry about it. Corporate worries about it for me. It’s a big number and we’re actually no different. We’re focusing on how do we increase our benefits to a level that attracts some people. I think we’ve increased eight different benefits in the last year and a half. Our last one we just offered tuition reimbursement for anybody really. I’ve seen others where it’s $1,000 towards it and we’re $5,200 and you’re just trying to stay in step with everybody else. • I would agree. It’s not going to go away, but we need to think about what can we be doing for our employees from a wellbeing standpoint, especially the younger generations, they want to have more of these tools and wellbeing programs and the vacation and the ancillary benefits. So that has been a big question and the other thing too is giving the decisions back to the employees. Instead of having one plan that has to fit everyone from the 18 year old to the 60 year old. How do we make the benefits fit every individual? We offer six different plans and you can do that through technology now and so here’s your app, here you go, young 20 year old, go make your decision what’s best for you or your family. I think it’s giving them more choices, but it is the soft benefits that are more important right now. • Just having tuition reimbursement -- less than one percent takes advantage of it, but they know it’s a benefit, right? It’s almost a cheap benefit. • I would echo on the wellness programs. We’ve seen and encouraged across all of our companies the implementation and push forward on wellness programs across a variety of different types, so obviously the physical wellbeing part to not only keep costs in check, but just to encourage, increase engagement productivity. We’ve seen some pretty big success come out of that where we have some -- a lot of it’s anecdotal because you’ll get a letter or something from one particular employee or 145

whatever it might be where some of these programs have really encouraged people and giving people the flexibility and ability to make some lifestyle changes that have resulted in them becoming not only healthier people, but more actively engaged, more excited about what they’re doing. These people are folks that are easier to retain in their current roles. They’re also motivated to really push and speak well about the company and potentially bring other people in. • I know you were speaking earlier about referral programs. We rely on that pretty heavily. We do it throughout the portfolio. We try to sponsor as much collaboration as we can so that businesses will talk about what’s working and obviously if you have a software company on one side and a heavy duty manufacturing company on the other, not everything they do is going to cross over and it’s not going to be the same population, but thinking broadly about wellbeing and what it’s going to mean to build a long career at a company that someone wants to be at, well, that is quite transferable and getting that going at an overall portfolio level has been a really big priority for us on the labor side. What about supply chain relationships? Are they getting more demanding? • They expect anywhere from five to 10 percent off the cost and we all talk about where that’s going to come from. They’re also smart enough to know that just can’t come out of price. So they’re actively involved in operational excellence projects with us and looking at setting up reduction with us, so they’ll send a team and we’ll pair up with that team and we just look at ways to lean off the operations. They’re starting to get that. They can’t just put the screws to us. At some point in time they’re going to put us out of business. That’s the reason for the consolidation because they can only do that with so many vendors. They can’t do that with 5,000, so they want to go out there and they want to be with certain organizations, but they want to partner with you. • They still dictate, but they make you feel better about it. It becomes more business, it’s all about speed for us and the business is just getting to be where you need to be more open with your customers than it used to be everybody was protective. And it still is, but you’re starting to open some of those avenues. At least the engineers are working with the engineers or the operational excellence people are working with the operational excellence people and that impacts you and both businesses win. • It’s quality deliveries that you just referred to. Half of our market it truly is a market where you’ll provide a quote, they don’t like the price, they go somewhere else. We’re not locked in like the medical industry is where you get certifications and so forth. They can flip a switch and just 146

move on. You get pretty instantaneous response if you’re not competitive. The catch all factor of government policies and regulations? Where is that? • The FDA can really affect us. We have a customer right now, we have a major impact on one of our businesses because one of our major customers is in the middle of remediation and if you’ve heard of remediation and what it’s all about, but basically one of our major customers is one of the largest that we have in the world in orthopedics hasn’t designed a single product in a year and a half because their entire organization is doing nothing, but remediation. So, all they are selling is their old product, which we’re doing a lot of that, but our business is predicated on new devices. They can’t bring any new products out because they have every engineer, you’re talking about thousands of engineers doing nothing except remediation and the FDA basically shut them down and they said no new products until this is all fixed. So, yes, in that instance that has a little bit of an impact on our business and a lot of customers and the speed at which the FDA is now approving new products is always -- they say they’re speeding up, but we believe that’s just a marketing ploy. They’re really not, they used to take 90 days, now it’s two and a half years to get new products out. That type of policy with the FDA is absolutely impacting everybody’s business. Honestly, the innovation is not there, it’s a lot more -- because in our business if something is similar to another product it takes 180 days to get it to market. If it’s a new product it would be three to six years. And so a lot of that innovation -- and you hear it every once in a while you’ll hear somebody on the news who says “I had to go to Europe to get this surgery because I couldn’t get it in the U.S” and that’s what that is all about.

147

FOCUS GROUPS

Mankato March 17

South Central College

Especially since we’re here at the college in Mankato let’s start by talking about one aspect of workforce readiness: retirements. Are they an issue? • Our succession plan is something we talk about constantly. We had a senior vice president retire. He was with us over 25 years. I certainly have an exit in my sights, like sooner rather than later I hope. I’ve been told by our CEO that that’s not going to happen sooner rather than later. I said, “Well it really is because I’m just not going to show up for work anymore.” So, yeah we do have a succession, we’re working real hard at that. We have several people looking. We try to promote from within whenever possible. We have gone to the outside on occasion. But we’re in the midst of that right now, so, yeah, it’s very real and it’s very near and dear to my heart right now. Because I don’t want to work very much longer. • We’ve had people there long enough, people who step in to take over, our operations guy has been there 15 years, so he’s very familiar with what we do and how we do things. Our CFO has been there 25 years. So we’re looking at that succession plan for everybody, at every level. Our director of development is also in her 60s and is looking at an exit strategy. So, it’s certainly something that we’re trying to address Sponsor: South Central College 148

constantly. But we’ve had really good success. But where we used to run an ad and we got 40 applicants, now we get 3. We don’t run ads in the local newspaper at all anymore. We haven’t run an ad there in 5 years. My background is technology, so we’ve done so many changes where we don’t run any printed ads anymore. Everything is on the web, everything is web based. All of our employment applications are LinkedIn, Craigslist, and things like that. So if they have the wherewithal to have a computer, get on the computer, at least we know that they’ve got some moxie to try to find a job. The unemployment rate in Mankato is something like 4.2 percent. • It’s crazy. But the quality of applicants we get now is much better. The last time we ran an ad we got like three applicants. Quite frankly, I think I would have hired any of the three. I think we ended up hiring two of the three when we only needed one. But I thought that the other applicant was so strong I said, “We’ve got to find a place for this person.” You know, they were good enough that we thought it was worthwhile. • We recently had a noticeable loss of capability in one of our processes due to retirements and changes. Now it had been a couple of years since the person in that area had retired, but we recently had a product that came back to us after a certain amount of time, and we couldn’t do it. So, suddenly we realized that we’d lost some capability and as we went back and looked at what happened, why, where. Well, it was a person who was in that area had retired and apparently that knowledge/skill walked right out with them. And that was the real first time for us – and partially because it wasn’t a repeat product that we’d been doing right along. But, interesting how all of a sudden that skill was – so we had to bring somebody in to train on that equipment. It worked out fine, but it was the first big realization that, whoa, we lost something here. So retirement was in the next five to seven years, we will have a lot of people retiring, or eligible for retirement. Now many of them say they’re going to work longer, but the possibility is definitely there. It’s definitely a concern. They’re in positions that sometimes take years to be honed, for those skills to be honed. • I’d say we have quite a risk. Our core manufacturing workforce, we’re averaging over 20 years’ experience. And if I look at the table, we have a lot of people who will be ready to retire in the next five years. So as we are very seasonal, we use temporary workforce to offset some of that seasonality. But as we see people coming in, or as we’re hiring for roles, we’re actually struggling with the quality of that talent that’s come in, that we can we train the new talent. So it’s trying to be able to have a plan to train that new talent, bringing it into the business, and time so that we’re offsetting the loss of the senior employees. 149

Do you have a formal way of institutionalizing their knowledge so you’re not so reliant on individual people? • We do. And there’s a lot of work – since I came on board there’s still a lot of knowledge in people’s heads and on the floor that we’re really trying to identify where there’re processes and how do we pull that out and get it transferred into other parts of the business. We’ve had a few instances where we’ve known people were going to retire and partnered them with people and have trained them but also did document the process. We’re formalizing that. Also, just in my staff alone, operations, I’d say my entire team is most likely going to retire in the next one to five years. So we’re looking at leaders in production management, manufacturing operations, quality, manufacturing engineering. Actually having bench strength but also pulling in new talent to take on those roles I’m seeing, is a little bit of a struggle. So is the bigger challenge that people are leaving? Or to attract new qualified people to replace them? • I would personally say that our biggest challenge, we’ve got 15 percent of our workforce out of 343 people, who are within retirement age or above. We, as a company, have changed some of our benefits to allow them to work longer at less time, to maintain some of that knowledge. But where we really struggle is that it’s hard to find the temporary work to take care of the peaks, to find the knowledgeable people. But one of the biggest challenges is just the generation that we have coming up into the workforce. They have a totally different way of work. They want to set their time. They want to be on the cell phone. They want to drive technology and it’s a challenge. How have you had to adapt to that? • Allow more use of the technology so on the production floor, I mean all they want to do is be on computers. So instead of the old process of more of a paper and documentation there’s a computer right within their workstation. That keeps them occupied. Allow them more access on their break time to be able to do this. More information on the screens to keep them updated. They really want to know every second of their day. A very scheduled philosophy of thought. So it’s added a lot of challenges. How hard is it to identify the next generation of leaders in your companies? • It is different. We have to be proactive. We basically have a list of young up-and-comers that we’re working on. Used to be, 20 years ago, somebody would show up and they wanted to get on one machine and stay 150

there for the rest of their careers. They’re bored now. So, we’re a union, and we’ve worked with our union and we’ve now got it so that people are rotating through a lot of different jobs, during the day, during the months, during the weeks. So they’ve got a lot of variety, they’re learning something new as opposed to having seniority, or “That’s my machine, I want it.” So I think you’ve got to be flexible for the changes that they’re looking at. They want to express their opinion. They want to make a difference. They don’t want to show up and go home. They want to make a difference and be listened to. How much of a challenge is that? Is it an opportunity or a challenge? • I’d say it’s more of an opportunity as long as you’re aware of it. It might be more of a challenge if you only have senior leadership and that type of thing didn’t get it. We’re fortunate that in our leadership we have a couple in their 50s, a couple in their 40s, and a couple in their 30s. So, we get a wide variety of insight when we’re sitting there talking about the challenges. • One other challenge is they like to move a lot. Not only internal to the job, but other jobs. They don’t want to be tied down. So, this same thing, the cross-training, the training to bring them up and try to build them, you get to a point and pretty soon you get to notice that they’re moving on. They like to continually move. That’s a big challenge. • We’ve been studying this. One of the guys we’ve been following says “Don’t hire someone like a millennial their first job out. You want to get them about the third job out, because you know they’re going to move.” • The interesting thing is that third job could be at a year and a half, that kind of a turn level. • It’s almost like we’re training leaders in general, not necessarily leaders in our own companies, so I’m depending on all of you to be training leaders. Because yours might be mine and mine might be yours. (Laughter) I know that on my own management team I have a couple in their 30s, and I wonder every day sometimes, when are they going to bring in their notice. You know, they love it here, but they need a new challenge. So my challenge is try and keep them on their toes, keep them moving and keep raising the bar for them. Almost daily. • To me it’s all about challenge. They’re always thinking about how to get into your office, behind your desk. That’s the goal for them. And then, that won’t be the end either. They they’ll be moving into another one. • So, it’s not easy to think that I might be mentoring and training and challenging someone today that’s not going to be at our company, I’m training them for leadership. I’m training them, but hopefully the rest are training some also. South Central is training them also, because we’ll probably be rotating. 151

• We’re taking a different approach. I don’t think one size fits all. One person may want the challenge but we’ve got somebody who, “This is my machine. This is what I do. I don’t want to do anything else. Leave me alone.” He’s been there for 20 years, that’s fine. If that’s what you want to do, do it. We’re doing some things where we’re having one-on-one interaction between everybody who works there, a couple times a year, with somebody in a totally different department that they never, ever have a chance to talk to. And they just talk. You know, “What do you want to be when you grow up?” And I said, “First of all I don’t want to get old and I don’t want to grow up. And I don’t want to do this anymore.” So they know that, they know there’re opportunities. But to try to get information, what you really want to do and bring that back to us. Cross-training everybody, so if somebody is gone on a particular day, there’re at least two people who can fill that job in our organization, every single day. But I think a lot of interaction, interdepartmental interaction, stuff that they don’t normally deal with. And we put iPads in every break room. We have them out on the production floor. We had, what I thought was a real strict internet policy, which I just tore out of our HR handbook. “I don’t care what you do on the computer. I don’t care what you look at, as long as it’s legal.” So totally changed that. I said, “I don’t care, do whatever you want.” He said, “You mean I can look at porn?” I said, “I don’t care. If it’s legal, go ahead. When you’re in your down time.” So we’ve got these iPads in the break rooms and they’re being used constantly. And they’re out on the production floor. They can’t use them when they’re working obviously. Those are just changes that we’ve made. I think the interaction with other people has been really valuable. We’ve got these innovation whiteboards where people can get on and share their ideas. One of them is anonymous, one of them is not. The anonymous one I struggle with from time to time because you’re going to say it, if you can’t put your name on it, you really want to say that? Anyway, interactions, some new things that we’re trying. And a lot of it is technology based. But I don’t think that one thing can fit everybody. You know, this workforce, they have different wants and needs than what they did 10 years ago. • We have individual development plans and overall career development plans where I will ask, “What’s your one to three year goal, three to five year goal, and your overall career goal? Do you see yourself running the company in 18 to 20 years? Where do you see yourself in one to three and three to five?” As a manager, try to give them the experiences and do what I can to develop them to get them to that point. It is a formalized system that we go through. Some of the bigger challenges are the three to five-year goals, more often than not, is a new employee shooting for a 61-year old, their position. The 61-year old is saying, “I’m going to retire in three to five years.” Then three to five years pass, we’re developing the younger 152

person. All of a sudden before you know it, they don’t retire and the young guy leaves because they were working toward that goal. In my generation, going through college, people have been trained to be very goal oriented. Lay out your plan. Lay out your aspirations. If you don’t hit them hang in there, but keep your options open. • That’s one of the toughest things. We have what’s called a TMS -- Talent Management System -- that you sit on with the employees and discuss just like you were saying, where they see themselves. But with the Baby Boomers, they’re working a lot longer. So you’re exactly right, with where these guys set their goals, they’re not retiring to the position that they want. Is there an adequate number of candidates to fill the jobs that you have available? • I think we have a really great talent pool. We’ve got some management positions right now that are open. We’ve got two openings right now. We’re using some national search people, we’re using some headhunters, and that’s really been a challenge for us. Some of the development people that we’re looking for, say they’re in California, they’re in New Jersey, or wherever, they’re not coming to Mankato. Certainly not for what we’re willing to offer. And even if we would offer an exorbitant amount of money I still don’t know that they’d move to Mankato, Minnesota. But with that said, the people that we’ve had have been here for a long time, but those people that we’re looking for I’m not necessarily sure they’re readily available in our area. • We definitely haven’t had too much trouble filling positions in production. But, that said, there isn’t a glut of people coming out of the college level, technical college or four-year. Most of the people that we’ve been able to hire are somebody else’s employee when we hire them, so we’re trading. And we definitely have had more difficulty in hiring people in quality and people in welding. Are you getting what you need from the local technical schools? • Probably the only thing we have a shortage finding is maintenance employees. One of the things that we’ve asked of South Central is to make their mechatronics program more flexible. What they’ve got now, you have to be a full-time student. So we had a really good maintenance guy who just went part-time so he could go through the mechatronics program. Going to part-time probably reduces the chances he’ll come back to us when he finishes with it. And we would really like them to be able to take a class at a time as a non-traditional student to the mechatronics but we lose them. So I would say that’s my biggest concern. • I think they are trying to work on that. There’s talk of the mechatronics 153

program and labs being open in the evenings and stuff. • Take a class at a time. One of the things they’re doing with our maintenance is we’re taking people who work in operations and production and moving them into maintenance, even though they don’t have the training. We’re training them on the job, but it would be really nice if we could sign them up for a hydraulics course or sign them up for an electronics course, or something to supplement that. So, I would strongly encourage. I think you’d find many, many employers in Southern Minnesota that would utilize an a la carte maintenance. • We’ve got a few of our production people whom we’ll give $5,000 as a scholarship every year, if they want. We also do that for their children. You’ve got a child who goes to college for four years, we’ll give every child of every employee $5,000 a year for four years. • If you’ve got six to eight people. Of course (company) is putting 60 people through. So when you break it down per hour, it’s so much per hour for that training, for me to bring in an instructor and the labs and everything. So, if you’ve got three people, and it might be three-hundred an hour, it’s going to add up to a lot of money if it’s 48 hours. • That’s what I’m trying to do. I sent an email out and got two companies that replied. I would love to get an MJSP grant, or at least try to get one, to put that industrial maintenance thing together, with two or three people from five or six companies would be wonderful. Because the trainer units for that training are like five grand apiece. We’ve got some that I’d like to buy more trainer units so we could expand the capacity. • Every time we brainstorm this kind of thing we’ve sent somebody up here. So we’ll continue to do that to be involved in your brainstorming to try and get something out of it. So, let’s move on. How’s the economy? • For us it’s just ok. We’re probably a third down. Most of the time we’re only pouring in two shifts when we’re typically at 24-hour. And the biggest reason is the ag economy. • The equipment producers, the John Deere’s, the Case’s, they’re down at least 50 percent. Some of the mid-market folks are down more than 50 percent, so that’s hurting a lot. • I’d say we’re about the same. One of our core businesses is tied to education so they’re not building new schools like they used to. It’s harder for the funding. I mean this last election cycle was huge, getting bonds passed, and referendums, so there’s some tailwind there, but other than that, the investment in education isn’t like it used to be. So we’re having to expand into other markets which is good to offset that, and not being as dependent on the core market. • Our business is fantastic. 154

• The food side of the platform is in pretty good shape. The soy crush side of it is going to go through the ag cycle that we haven’t been through yet. You know, prices are up 40 percent from what they were in years past. That’s why you’re seeing John Deere, Caterpillar cut back. The food side is going to be pretty good here for the years to come. But the soy crush and the animal feed side of it is going to be under some pressure. • Well, we’re just so tied to so many different markets, commodities, agriculture, both of those being down significantly, that puts a big dent in our plans. But on the flip side, you have military and just some other areas that are strong and commercial construction kind of teeter-tottering, soaring or staying sort of solid. We have 10 percent growth plans, whether that will happen is just going to be very dependent, especially in the commodities market. Oil especially. Oil is a tough one for us this year. Any issues with shipping or logistics? • I’d say we have three fronts. One of them is that we ship durable goods to our end users and are working primarily with LTL shippers. I mean they are doing very well this year, but the quality of their service is horrific. Our damage is up considerably, like it’s never been. Their on time is not as good as it has been in the past, but they’re ok increasing the price. So we’re really looking at what’s the best way to get to market in a different way. We also own our own small fleet where we do installations, so we have drivers who will go out, drive, do an installation at a site and come back. But with the increasing DOT rules, it’s becoming a very difficult model to manage. We can’t get people home in a week. Thirdly, the issues with the ports really slowed us down. We do have some offshoring we rely upon. In addition, we have international customers and that really created some headaches. In some small instances we resorted to flight. For most things, what we did is we were finding alternate routes off the West Coast, whether we were going through Vancouver or even the East Coast. • We avoid LTL at all cost. It’s horrible. • Yeah, that’s what we’re trying to do. It’s, “what are the economics?” Because the price differential between LTL and TL is so great, but at the end of the day are we really saving anything? Or do we need to look at another way to approach that. • I don’t know that I’d want to be in the trucking business right now. Just trying to find truckers. I can’t tell you how many Eastern Bloc people have been trying to communicate with us. They don’t speak one speck of English. Get a cell phone and hand me the phone, or hand somebody the phone. If you’ve got a pulse you can get a truck driving job if you’ve got a Class A license. We’ve been really lucky to deal with some truckload people that are local and we sometimes probably pay a little bit more than we should or could, but they’re really loyal to us. So we’ve kept those 155

people in the fold because of that. • That’s what we’ve done with our fleet. But it’s a tough job and these guys look out and are stalling on the road for 20 years. They’re ready to come off the road. And it’s harder to replace that. It’s really the talent. So we’re really trying to decide what’s the best approach. • We probably send on an average, over 12 or 15 semi loads a day out. And it’s hard but our local people really, really come through for us. But we’ve been pretty good to them too, and for a good reason. There’s no question about it, the LTL is awful. How about the cost of healthcare coverage? • It’s huge for us. We’re a small group. We have 125 employees and probably 50 – 75 of them were participating in our group insurance, give or take. So that’s a pretty small group when you go out and shop that. So, totally at the mercy of the profit generating insurance companies, anyway so, we drop it. So my heartburn is how much is that binding me? • I would say we’re continuing to see pressure. Oddly enough, this year was one of the few years we did not see an increase, made some changes and that’s worked to our employees’ benefits. But it’s continuing to escalate and add pressure as we look forward. • I should add to that we do give all our employees $750 a month to use for insurance or whatever they want. So I didn’t just drop it. The benefit is good for the employee still, my heartburn is what’s it going to cost? • Well we’ve been doing it for at least 5 years. • That’s amazing. • But it doesn’t count toward providing for health insurance, which I believe is a crime. In fact, our own employees internally wanted to write letters to our Congress people, so they did. The generated a letter. What about other employee related costs, like wages? • I think it’s pretty much as anticipated. • Our production will see increases in their paychecks within the next 30 days, every single one of them. For that reason, we know that the handwriting’s right in your back door there, we have to increase wages. • We are having to increase wages. We’re seeing wage pressure, just with unemployment being so low in this region, to attract people, make sure we’re getting people that are competitive on the salary workforce. But we keep hearing this term that we need to pay city wages, and I’m like “Holy cow what’s that mean?” Maybe we need to make sure we’re paying a competitive wage, and never drop talent. • I don’t see us losing employees. I think a greater point is trying to bring in talent and at what rate do we bring that talent in, versus where that base was originally for our company. I think it’s a much more competitive 156

market out there than maybe the organization anticipated. • I think it’s more in the entry level too. I think we’re probably underpaying at the entry level. But we had so many people over there for 20 years and they were probably overpaid because of the longevity. So we needed to close that gap, so everybody gets a raise of a minimum of $1.25 an hour to $3.00 an hour. But it’s at that lower end. Most people are going to be real happy here in a couple weeks. I don’t know, I don’t want to lose them either. • Sounds like you’re experiencing something that’s just the opposite of what we typically see with many employers is that you get wage compression. That the starting pay is increasing at a rate that’s higher than the rate we’ve been keeping our existing population. So you wind up bringing new workers in making close to what your long term employees are. So are you doing anything to look at those wage compression issues, for those of you who are experiencing that?

157

FOCUS GROUPS

Redwood Falls March 17

Duffy’s Restaurant

How’s the economy? • As an older person having seen the ups and downs with the ag rural community, I started with agriculture in ‘68; I think we are headed for some tough times. Nobody really wants to admit it, but agriculture does drive everything. With the prices that we have, with the programs that are going on, with the things that are being done, the number of acres that are going to get taken out of productivity again right here in Minnesota we are going to see some tough times. It will take a couple of years to affect us, but when they quit going to the dealership locally and spending $300,000 or $500,000 for that machine, it’s just going to trickle on down. I have a son that is in the ag business and they are already seeing it, they are losing salesmen, they are dropping off the face of the earth because they can’t feed their families, those type of things. So, short term we are going to do all right I think in the next two years, year three I think we are in for some real wide eye openers. Agree? Disagree? • I have to concur with that. Right now we have three houses that we are doing millwork for and all three of them are farmers, which they started Sponsors: Redwood Area Development Corporation, Southwest Initiative Foundation 158

building the house year and a half, two years ago, none of them are retired, they are all in their well one is in his mid-50s and the other two are in their mid-40s. Two of the houses are rather large Mc-mansions, one is more practical, but I think for all three of them, had they known the farm economy was still, the pricing was going down, they may not have pulled the trigger quite so quickly, you know. But we are still seeing good activity in the Twin Cities and Sioux Falls markets, there are some houses being built there. But then we’ve seen it before; being in the rural community out here, farmers are doing well, we are doing well. It affects a wide range of industry. It’s not just directly related to the ag industry. • I think most of our business that we have is not local. We believe the fact that the dollar, right now, is getting stronger every day will likely hamper our ability to grow. • The economy hit rock bottom there in ‘08, ‘09, right? It took us until about ‘09, ‘10 before we really saw it in our industry. A lot of our business is big, big, kind of big construction projects right that were tied down to money, so those progressed as planned. I do agree though that we are slowly closely tied to the ag, it is an agriculture economy around here and we do depend on those farmers. But no I don’t know that we expect to see a huge growth here in the short-term of ag products, it’s probably more in localized in that five to seven range, but most of our expansion is going to come from our New York company. Let’s extend that. What do you envision for growth in your own company? 10 percent? • We say that’s accurate for us. • For us guys that have I mean, we don’t have any customers in the state of Minnesota, we deal with foreign governments and federal government type stuff all the time. Whenever there’s military activity it takes all the big contractors out of our market. So it leaves all in $5 and $7 million dollar deals down for the real people to feed on and we have competition at our level as well, but it takes the big guys out because that’s all bought and paid for. If you don’t have multi-billions and people to go to Washington for you and lobby for you and those kind of things it takes you right out of the game. Now if that is all moving up, in that case, it gets better for us. So we already hired one person, looking for a couple more. How do you feel about competition from foreign sources? • It’s increasing in our business. The quality isn’t there but the price is and with the marked attitude, it’s $3.99 here versus $7.00 for one that really looks nice and it does the same job, so I think from that aspect 159

there, I’ll use China as an example, spends a lot of time trying to get into our businesses, get into our websites, steal our information so that they can build it themselves. • Doesn’t affect us. • We have quite a broad product offering and so we tend to have strong competitors in our segments, but not overall like us, so we are experiencing some price pressure generally speaking. I would say domestically that is from domestic factors and overseas. But we also have manufacturing facilities now in Shanghai, Ireland and Belgium and so we have maybe positioned ourselves to do more of that work locally there, right, cost of transportation on the staff moving across the water is incredibly expensive for the size of things we build. • For us in the wood industry it seems to be less of a problem. I remember being at one of these meetings, back in the late ‘90s. The guest speaker had just come back from China and he reported that they were leveling mountain tops and creating factories. He said watch out, they’re coming, they’re ready and willing to produce anything we make here. Sure enough, in the early 2000s, we had been making wood products for (name of company) at the time, and it was going very well and all of a sudden they asked us for new pricing. They came back with the pricing they got from China for the very same parts and it took us out of that market. That same speaker said this will last probably 10 to 15 years and then their wage scale will go up and some of it will start coming back. It is now coming back, some of the furniture companies are starting to rebuild here in the U.S., using computer controlled equipment, robots, and things like that. China had poor quality, we had to order full container loads, wait for six weeks to two months to receive it, and only then to find out half of it was garbage -- and there is no recourse. One of the largest items that got taken away from the cabinet industry was drawer sides, drawer boxes that dovetailed on the ends are typically made out of beech or hard made floors or something like that; they went immediately to China in the early 2000s. That’s all coming back now to the U.S.. They can be made profitably here in the U.S. today. How about another one: government policies and regulations? • It’s overall anybody that represents, we the people, has lost their integrity with the people because they lie, they cheat, they steal and they laugh about it. If, you know, you talk about government regulations if they just actually followed the regulations that they currently have on the books. Now, we don’t need a lot more, I mean throw 50 percent of them away and then force two percent, we’d be in business. • A couple years ago we bid a system for a government agency, a federal agency. They found out that that type of camera could only be bought by 160

a U.S. manufacturer and sold to a government agency, “buy American.” So, they rewrote the contract so they called that camera, because it’s got a bunch of computers in it, general computer equipment, which can be purchased outside the United States. Say that again; how did that work? • Okay, you can’t buy a camera, you can’t buy the things that we build outside the United States if you are a U.S. government agency, there are more than us that make these things, but we met the specifications and we were the low bidder. But they pulled that in and then they rewrote it because they wrote instead of being a camera, they wrote it as general computer equipment, because you can buy, legally, buy general computer equipment wherever the best, wherever it comes from, it doesn’t make any difference. It doesn’t have to be a “buy U.S.” deal. But not only did they fail to follow the specifications, we actually met the specs and were the low bidder. Municipalities are big in that when you go to compete. The competitors, the specs as you say were written in by someone who’s got a friend, who’s got a friend and when it comes out in public, which is the small businesses out in rural America, you can’t bid on it because it’s got to be this, it’s got to be that, you know, it’s all written. The end product, anybody could produce it that could compete in the bid, but because they’ve got friends on the inside that do the writing of the specs, you’re out and that happens on a weekly, monthly basis out here in rural America. I’m not sure about the sign business. • Ah yeah, so we get, we actually use that to our advantage, matter of fact. Not all signage manufacturers get filled in the exact specifications so that is actually a strategy we deploy to keep competitors out of our market. We get them to spec our product instead of the other guy. So I don’t doubt that. Another source of potential heartburn is the cost of providing employee related health insurance. • We always took the attitude that we were never large enough to put together a cafeteria program and all those kinds of things, so my attitude was that, okay we’re going to pay you a bunch of money. I mean, I’m willing to pay all this money to have you onsite working for me and if you elect to take a healthcare package we’ll be happy to take that piece of this pie and give it to pay your healthcare for you -- because automatically this much is an expense to us and then you just don’t have to pay the income tax. That dollar just got 30 percent bigger and so I never could understand what the big heartburn was about you know, standing up as an employer and saying this is how much I’m going to spend on you, I don’t care what you do with your money, but if you want to gain 30 percent 161

of your healthcare bill by letting us pay that for you, take it out of your wages, you know, we’ll pay it. It just gets 30 percent bigger, because you don’t have to pay State and Federal and FICA and all the rest of the junk and we don’t either. We gain, you know, we gain this much, but they gain 30 percent right off the top of the money. So I never did figure out why the people couldn’t just stand up and say this is all you’re worth. You elect it and we just pay it, just take it out of your wages, you know. And so it was a 30 percent gain to them to have us just pay the bill. And I think a lot of people missed that point, including the people that worked for us. Everybody assumed automatically that’s an entitlement, it’s not part of a wage package, it’s an entitlement. Once again everybody is entitled to a lot of things. • I’m not far enough up in the ranks to know the bottom line, but I think it’s been about five years since our company has made any changes there to what you pay in, right. We went to a high deductible health plan about five or six years ago, so there’s been no change there really for the employee in terms of what the insurance covers and what it costs them, so I don’t know that it’s had a huge impact the last five or six years. Another area we’re talking about this year for the first time is shipping and logistics. • I’m sure everybody in here has been affected roughly in some degree by the labor issues on the west coast, so part of our sub-components, what we build, come from overseas, typically Asia. I think that has all been resolved but I think there’s like a figure that it will take two to three months to work through the backlog before it works out, so that was a big deal. We incurred a lot of extra costs to air freight stuff. It got to the point where it was either shut the factories down on the orders for key components so that was a big deal. But we’ve been through that off and on, you know, it seems like every few years that kind of rears its ugly head. So typically with our overseas that cost has to be passed over to the customers, so I don’t know that that necessarily impacted up. I think we maybe lost an order of two because of having to ship that product. • You mean the fact that the crane operators went from 300,000 to 250,000 in year? • The average dockworker on the west coast makes $50,000 and they always strike about Christmas time. I mean, more power to them, right? They know what they are doing. • UPS is a challenge for us, we are fortunate in the close area to have Speedy take a 10’ field marker, calling UPS and people in Hawaii on a 10’ field marker so we went to making two-piece with a turn buckle for those type of situations, but now everybody’s wanting full 10’, they don’t 162

want anything here and UPS can’t deal with those issues so they are a real challenge; it gets very expensive. • I was going to say the same exact thing. We ship wood moldings across the U.S. and the east coast seems to be the big buyer here in the last half of the year. But the same thing, it’s fortunate we have Speedy cause they’ll take the 10 footers, but it better not be 10’ 1” or we’ve got to send them back. • And they better not be past Missoula, Montana because it’s going to come right back to you, because they don’t go that far. • We ship (name of company) quite a bit. They ship pallets up to 16’ long and 4,000 pounds, full of wood moldings and whatever it is, ship it to the east coast but it’s those few pieces of 10’ or 12’ maybe just a couple of sticks that weigh 20 or 30 lbs., you have to call (name of company) to ship it there and it’s going to cost you $125 to get those few pieces from here to the East coast. There is no other option for that, I wish there was. Would make us a lot more competitive. • In general there continue to be some constraints that on the (name of company) even full truck load. The strikes with drivers are not so much rates it’s that there’re constraints on riders. We saw a lot of shipment damage here in the last 12 months and have taken some steps to modify our crates to make them a bit sturdier. They are trying to jam these trucks way more full than they used to you. So there has been a little bit more movement there to start charging volume versus weight? Right? It’s all about the amount of space you are taking up in that truck versus the actual weight, so there are some challenges there, more so probably in the last 12 months, it’s been pretty steady for us. • We see things like forklifts that go complete through our product. It’s unbelievable. You can’t believe the things we see. But keep in mind on that (name of company), it’s in many hubs before, between your dock and where your end-user is, that thing is off and on many trucks before it ever gets there, depending on where in the country you ship to, obviously. Even your big signs, you direct ship those. Yeah, so smaller stuff, (name of company), the big stuff we are contracted out to a company out of Sioux Falls actually comes over and picks up the stuff and packs it on site. What about the so-called “skills gap,” your ability to attract and retain qualified workers? • I would say for professional positions or degree positions, we still struggle with getting them here and keeping them here. We seem to be better at getting them here than keeping them here. I think that for younger generations, it’s the social aspects, maybe, that are difficult. So I think it’s true of even the hourly, it seems to me it’s a pretty tight labor 163

market. For us, we still struggle a little bit for various reasons, like housing is an issue here in Redwood. I would even go so far as to say daycare is an issue. It’s one thing to find daycare, but can you find daycare that will take a kid at 5:30 in the morning so you can get to work by 6:00? • I actually think it’s a little bit better than it was maybe a year or two ago, I just think of the positions for folks I supervise. We’ve had a little bit better luck here; better candidates, better here in the last year than maybe a couple years ago. • We’ve added some positions here in the last 12 months. Technical work, technicians, tech work has been probably actually where we have had the most difficulty the last 12 months, filling those positions. So you think of like machine techs, folks who fix machines and maintain machines; that’s probably where we’ve had the most difficulty the last 12 months. We just recently hired somebody for a job that’s been open for six or eight months. • Spousal employment is another thing with both parents having to work in this day and age. I just had a guy walk in the door, his spouse had gotten a job in Redwood Falls and he wanted to live in the rural area and I said, “See you Monday.” Do you expect your workforce to grow in the coming year, or to stay about the same, or to shrink? • To grow. • Yeah, marginal growth, probably so. • When I first moved here, I advertised for some temporary people and almost instantly I had four people with degrees because they couldn’t find anything else. Now, when I advertise for something with degrees, I’ve had advertising now on the Internet and other places, for up to six months and have two final candidates and that’s for fulltime. And temporary work lacks dependability so they just don’t beat down the door. And I really kicked up the advertising at radio stations, different newspapers, the usual. • I will put a plug in for MinnesotaWorks, having used it. It’s amazing how many people have moved out of the cities with degrees who go to that site. You’re looking for somebody here and wow, here they come with all these degrees, and I think that’s something people overlook if you are trying to get the market for your normal laborer, you’ve got the pick of the crop. How about retirements? Do you look at that as a challenge? • Huge: we have got a problem brewing there. I want to say our average hourly operator is age 55. We’ve seen that number come down a little bit with retirements and replacing them with younger folks, but that is going to 164

be a huge deal. I would almost argue it’s already a huge deal. I don’t know where that next generation is, to be quite honest, about what they are doing. We also have recently expanded, some of the work that’s in that building is a little more physical than what has been typical in Redwood so we are even finding a lot of folks who can’t do that work. • And we are struggling to find people who are willing to do it, but yeah that’s a huge problem. Matter of fact, I would argue that will be our biggest problem over the next decade is how we will replace those folks. Do you have a formal program to retain the retirees’ know-how? • For the most part I would say no. I know recently we’ve brought back an individual who had retired that had some specific machine technician skills that we wanted to utilize and he came back part-time for us and works specifically on a project there. But no, I would say in general we do not have a plan there to utilize those folks. Or how might you, is there something to offer those folks maybe even to get them to stay a little bit longer, maybe it’s benefits at 20 hours a week or something. Folks are living longer, too. They could probably almost expect to work a little bit longer too. • We do not have any part-timers, matter of fact, very few. We had some folks who had set a retirement date and we have maybe hung onto them a little bit longer by offering them some good part-time incentives for a little bit longer with some concessions to them with more time off and things like that. I imagine those programs might need to become more prevalent as we enter into this. Yeah, it’s a problem, I don’t know if it’s the same for the others but it is going to be a problem for us. • We have the same situation with one individual who’s given us his date and he is in a key profit center, highly skilled, it’s going to take six months to train any other individual, the type of job is not a job you’re finding around the southwest part of the state, so our hope of finding someone who knows how to do that is zero. • We need to find someone who wants to do the work. We were trying internally, we don’t know if we’ve got someone internally who wants to move into that position. It’s one of the top paid positions, ah, it’s most like a machinist in metal working probably. So, yeah, there again is retirement and he’s thinking about part-time but no guarantee. • We need an OJT program. • If people have a second, can I throw out a question? The main thing we are hearing from people besides labor and the retirement is the housing and childcare. I’d be curious if anybody else had housing or childcare issues? • The State came out here and did a big meeting this summer. I think they were expecting to talk about labor and talent and all this stuff, and 165

35 or 40 minutes of the hour people were going off on childcare problems. • I think finding childcare is a little bit easier than finding childcare that can accommodate the hours. We may find ourselves in a position where we will have to modify the hours we work to more in line with when daycare is available for young children. • Now that’s one thing, the average age is 55, we don’t have a lot of people with kids to be quite honest with you in our facility, but that is going to quickly change. And so, I personally, have had trouble with it, right so when I moved to town I must have called 13 places before I finally found someone. For a brief period of time, my wife had to, to have our last child, had taken a leave of absence, maybe that’s the best way to say it and we actually drove to Morgan every day for two months for daycare. • Now keep I mind, I’m a guy who can get work from 8:00 to 5:00, right, but the daycare I have now, they are not there before a quarter to 8 and we better have them picked up by 5, so my wife and I have to kind of work out a deal where one of us can go in early and one of us can stay later to meet those hours. But yeah, I do believe daycare is an issue here. • And daycare providers are getting older too, so when they retire there is no one to step in and fill that void, so we need to look at some kind of daycare center, I think, with extended hours. • And when mama’s got to go to work and papa’s got to go to work, she’s got a runny nose, back in my day, it was, ‘Mama you’re staying home, I’m going to work.’ It isn’t that way and now you just lost your best man out there on the floor for the entire day or three days, there is no back-up daycare system to where I can set… • When I sit at the employee meeting and say ‘Hey, this is our crunch time, we really need you,’ it’s ‘yeah but she’s got a cold.’ • Back in the 1980s, I’m from Mankato, and some of you may be familiar with Taylor Corporation and Taylor’s printing companies back in the ‘80s, this was the similar issue, so he opened his own daycare. I’ve heard that topic come up in the last year from a few other companies about the possibility of I can’t expect someone else to do it, so that might be a model that makes sense. That daycare is still in operation.

166

FOCUS GROUPS

Minneapolis March 18

Surly Brewing Company

Let’s start with workforce issues, particularly the much-anticipated retirements of the Baby Boom generation. Worries? • We are actively taking steps to recruit and train a new generation. Which is to say that we need a different type of communication. Some of the younger generation of people we see have different goals. It seems like life away from work is a much bigger part of their existence than what we’ve typically seen in the past. But we continue to drive down that average age by training internally – has become a much bigger emphasis for us because we’re just – as we talked about before, it’s very difficult to pull the people from technical schools. There are a few people coming out of technical schools, they’re in such high demand it’s tough to grab them. They’re already spoken for in most cases as they come out. Do you have a formal process to capture all the information that you might be losing with all your retirees? • We are going through a much more documented work process, than Sponsor: Baker Tilly 167

counting on that tribal knowledge. That’s been a big initiative on our end. We document what we do on a daily basis so that it’s there for someone to look at as we move forward rather than in someone’s head. So yes, that’s been a big initiative within our organization. Is there a difference in the kind of culture you find with employees who may be located in non-metro areas? • I’d say out-state is more preferable for most production jobs we find. We’re lucky we’re so close to the metro, but still 95 percent of all metro workers are west of our location, not east toward the metro. Most management is toward metro. It’s kind of nice being close without being too close. We’re one of the few plants with the luxury of drawing from the metro and also drawing from the rural areas. • Being that we’re a new company, it’s all kind of from the ground up. We’ve been pretty lucky. So we certainly have got a lot of people who want to be in the beer industry. We’ll have some young people who will work here who probably wouldn’t want to work making cheese. It’s sort of an odd thing. It’s still a job. People still have the same amount of bills. The big challenge that we’re seeing is now we have a front of the house, a hospitality side. And the wages that are being made over there with minimum wage and the tip, no tip credit. I mean the wages that people are making for the dollars the people are bringing home in the front of the house, it’s terrifying compared to what they make in the back of the house. Really scary. Most companies don’t have the same thing. I mean, I think we all compete against that for workers, because you know, people kind of go where money is. We’ve had discussions that, that can’t be seen. Because someone in production – you know, we make probably most of our revenue comes out of the production side. Anyone else down here, retirements? Does it affect you at all? • We’re hiring primarily engineers, chemical engineers, and mechanical engineers. They’re good people, but I don’t feel like they’re as committed to the success of the company as perhaps the older generation. And that’s a concern of ours, if our success is dependent on the current root of people and is the culture transferable to the next generation? We’ve already seen some of the younger ones who come on board for two or three years, then move on. And that is a concern for us. Are they committed? We need that. We have a long learning curve. We need people to be committed to our success. We worry about it. • I grew up when I saw the companies fail their employees. I mean I was around paying attention to stuff. The older employees grew up with the mentality, you take care of the company, you care about it and the company takes care of you. And I saw in the late ‘70s and ‘80s companies 168

abandoning their employees, kicking them out for no good reason, mass layoffs of the tens of thousands, liquidating pension plans and things like that. I think that’s what a lot of, they call them generation Y or millennials or something, they saw that. That’s their feeling. They were raised that the company doesn’t care about you. You work there for money and that’s the end of the relationship because I don’t think – I’m probably on the older end of that feeling, but a lot of my peers never felt that kind of love of their company, like other generations did. Because to be honest, in the 70s and 80s, industry stomped all over their workers and basically cut that, you know stomped all over that relationship that people raised in the 50s and 60s feel. But I think it’s a great point, it’s very definite that the next generation doesn’t have that “I’m going to work 80 hours a week because I want this company to succeed.” And really take it to heart as much. Just because it’s that background. We don’t have pensions anymore. We have 401ks. If they quit tomorrow, they take that 401k with them. So what’s the attachment to the company? How do you cope with it? • You try to engage. You try to explain. This is how we did this. This is how we lowered this cost. This how we set up the line. And then we have profit sharing, so it’s like “What you do every day counts. Look, this is what we did. This is how we improved. This is money in your pocket now. So this year, if you do some more things, here’s the direction we’re going to go to improve things, next year you’ll get more money in your pocket.” It’s more of a monetary transaction nowadays than company loyalty transaction as a general rule for younger employees versus older employees. Because older employees they try their hardest, they care about the company. They live and die with the company. And I don’t see that by 30 year olds anymore. And I don’t like it. • The big difference is the older employees, when nobody talked to them that was a good sign, you’re doing a good job. Millennials need a pat on the back, every day, every week, and you’ve got to understand these nuts. These are nuts. I still don’t believe they asked me back here. • (Laughter) • You’ve got to understand the culture and the thought process, even if these kids saw their parents get laid off years ago, they’re still skeptical. But they’re not engaged like the older folks. I look for an average hourly wage in my company to remain competitive. But I decided to look at an average age – could actually be age discrimination, one of you guys could take me to jail. • (Laughter) • I need help already. But you guys understand that’s how I ended up with five generations. Because I looked for the age brackets for the tribal 169

knowledge to drop back. You can find the workers in that group. You might have to go through a few. • You know, with the trade jobs, the machinists, welders, electricians, those are hard to come by. Very hard to come by. It’s a union environment, but good workers are extremely hard to come by. There’re just not enough people coming out of the trades. On the other hand, to hire an experienced project manager, it’s unbelievable. You can throw an ad out on the Internet, and just get phenomenal experience out there. Just a ton sitting on the bench all over. You know, probably middle management type on up, there’re just tremendous skills out there. • Maybe a good maintenance manager is always hard to find. But that’s more of your skilled training. I just think that half the kids who go to college shouldn’t be in college; they should be in trade school. And that’s the real dirt in this country is. I mean, my dad’s an electrician; I’m an electrician going through college and stuff. All us kids have been told since 3rd grade, “You have to go to college. You have to go to college.” Not one of them said, “Go to a trade school, start off $80,000 and have a great life.” • All they had was $200,000 in debt. • It’s not just kids. It’s the parents too. I’ve got two in college and one in high school. The one in high school, he probably could be better served in a trade school. But as a parent, saying to all your friends and relatives, “Well hey, Conner’s going to go to trade school.” It’s got such a stigma these days. • For lots of years, college has been oversold. Yeah, parents, grandparents. Everybody wants you to go to college. And it’s like, you look at a lot of trades, they have a lot higher starting salary and a lot higher lifetime earnings than a degree in Sociology, no offense if anybody has one, will have on average. And I don’t understand why someone getting a four-year degree in Sociology is such a platform versus somebody getting a good two-year degree in electrical, or mechanical or HVAC, or something like that. There’re like 5 million jobs in America needing those skills and for some reason it’s seen as an inferior providence. Maybe if universities had degrees in being an electrician it would be better, right? What do you look for to fill those technical jobs? • There are a lot of people out there with engineering degrees. But what we see is, it tends to be much more those engineering degrees don’t necessarily relate to what we’ll call some of the old school manufacturing. They’re very much more science oriented. Newer technology. So when we’re old technology, old manufacturing. We struggle with that. We get engineers, but they don’t know how to make anything. They don’t just don’t have that practical knowledge. Literally, I grew up fixing bicycles and doing those kinds of things. People don’t do that kind of thing anymore. 170

There’s not this hands-on, mechanical aspect that comes with someone who’s in that field, engineer, anymore. It’s just not what people do today. • Which kind of relates to the trades part of, people don’t do… if it’s broke you get a new one, you don’t fix it. You know my dad grew up working on his car. So I think back to that. We had to go to college because how many people take things apart and put them back together. There was an article in the Strib six months a year ago about some kid welding. It was a great article. That’s to me is what there needs to be more of. Because the more parents that do know. They’re in the same boat. Seeing a lot of that. We don’t have anyone in those trades and everyone is retiring. And they’re desperately trying to pull people in but there’re not enough people coming out of the trade. Do you think the problem will be fixed by the law of supply and demand? • I don’t know. The scary part is, Minnesota is better than Tennessee. I have to take crews from Minnesota to Tennessee to fix anything. Because all the trades down there are 10 times worse than here. Even if you get people they don’t know what they’re doing. They don’t fix it right. Even though everybody is complaining about Minnesota, which I understand, at least here you’ve got people who are capable. I have to truck a thousand miles to fix my Tennessee plant. I don’t know how else to describe it. • So what do you think that goes back to? Education? Or trade school? Or unions? • Education. Not the union. But I mean education and training in the Midwest is generally superior to most other parts of the country. Is work ethic part of it? • We definitely see that. I mean we have a lot fewer attendance issues and work quality issues in Minnesota than we do in a lot of other places. • The public school system. It’s actually pretty corollary, if you look at the ACT scores, or something, for the upper Midwest and the rest of the country. I think general high school employees, whether they go to college or not, are a little more skillful than a general high school employee in most other areas. So we’re lucky. Where are you with how you think the economy is going? • We’re planning expansion. We actually planned the expansion in 2008 and stopped it right after 2008 did what 2008 did. And in retrospect maybe that wasn’t a good decision. But there are opportunities out there. I think presently, part of it is, there is a big portion of the business owners, there’re a lot of baby boomers who are going to reach or are reaching a point right now or in the future where they want out of what they’re doing. There’s 171

a lot of small business ownership with owners who are reaching that retirement age and there will be a lot of opportunities, things happening in the next five to 10 years. I think there will be a big transition that takes place. There will be opportunities for those who want to take some of that on. • Of course I am. And I really am not optimistic about the U.S. economy. Even here in Minnesota, General Mills, Target, other companies in the food industry that are reacting to changes to in the similar behavior. I don’t think it’s as solid growth as people are portraying. I think we might be on the edge – I’m not saying a serious downturn, but something. It doesn’t feel like it to me. Now I said we’re 50 percent export, so we’re not totally dependent on the US economy. • The strong dollar hurts us. The fact that China is slowing down in terms of capital investment, really a lot of our business the last 10 years has been in China. And they are definitely slowing down. That’s another kind of component of the world economy. If China slows down, it’s going to have an effect on a lot of people. • Unfortunately an economics minor in college, which I didn’t need to do by the way, makes me look at the money supply and the printing and the experiment we’re doing and it scares the hell out of me. The more I read, the less I want to read, basically if that makes any sense. • Either you grow or you die. I have to make opportunities. I’m stuck in a job I can’t quit. So you understand that I have to keep plugging along, I have to go. And maybe not in a bigger way than I want to. Because I maybe not going to buy the M & A opportunity from a guy 10 years older than me, to double my business which would synergize 60 percent but it kind of scares me. Do I want to do that and risk it all? Or do I want to remain debt free. I have an internal conflict that I’m just sharing with the table. • Well ours is because you have to become more efficient. And to be efficient you have to spend money. If you’re not becoming more efficient, you’re becoming less efficient than our competition. And our creamery had some struggles and so they were becoming less efficient for a decade or so. And we’re kind of making up for it. You know, I hate a strong dollar, but I’m still, I think, tied to agriculture and in good shape because we are the world’s breadbasket. The rest of the world becoming more urbanized is just creating greater and greater strength in agriculture. I don’t think if you’re tied to the agriculture industry you’re going to be in that bad of shape in this country. Because that’s so much international dollar. The dollar gets stronger, the dollar gets weaker, and that’s going to play itself out. So agriculture I think is – but just for the general economy, I don’t like it. The Fed is stealing all the money from the retirees by these lower interest rates, and all this kind of stuff, the games they’re playing to balance the budget 172

and everything. But, I think it’s just kind of spotty, bright spots and dull spots in our country. So it’s kind of neutral. I think the market’s oversold. The stock market’s going to come back down from where it’s at. But something someone said about 2008, are there great opportunities in down economies? • Well I mean, interest rates are a topic on its own. Number one, I think money is so cheap right now. Number two, I don’t see any reason how we can raise interest rates when you look at all of that debt now is such short term. A raise in interest rates would have just unbelievable negative effect on the amount of GDP required to repay debt. It is such a short-term cycle, so I have a really hard time believing that we’re going see interest rates go up. But when I think about how I was able to make it work with seven- and eight- and nine-percent interest rates, 15 years ago or whatever it is. You can borrow money for three percent if your credit is solid. It’s not a bad time to borrow money and go forward. • You don’t want to spend a $100 million and then your interest rate doubles. Let’s quickly discuss some challenges that always seem to confront manufacturers. The first is competition from foreign sources. Where are we on that this year? Is that getting better, worse, staying the same, not a factor? • I would say for us it’s about the same. So we used to compete with Europe – China from 1990 to 2005 was fine, the best technology they could anywhere in the world. So we were competing with Europeans. And now they are local technology. They’ve absorbed enough intellectual property that local companies have upgraded their capabilities so now our competition is local instead of the Europeans. How about the evolution of supply chain relationships? • I think that continues. I think that it’s been a little bit of an evolution for us as we’ve developed longer-term relationships and longer term contracts with customers who have product line type equipment. You have to carry the load for them, as a manufacturer, they will manipulate you and force you to carry inventory as much as they possibly can. • For free. • Absolutely. • And quite a term, but it means that you’re going to cover it for them for free. It’s your fault if you miss a shipment even though you have a blanket order you’re trying to manage. You’ve got inventory. • We actually had success in that area. To the extent that we have an OEM, a little different situation than you guys have had. But we’ve had 173

some people who really pushed us around and the last year or so we’ve been basically able to fire the customer and say you’re not worth it. And here’s the price, it’s quite a bit higher than it was, and they really don’t want to buy at that price. So it’s been a little bit of a shakeup that way. Some of the people really push their suppliers to the limit, like us, and we basically walk away from that account. And they’re not able to have another person come in as cheap as we were so we just walk away from it. Did they not come back to you? Or did they renegotiate with you? • No we actually walked away. We gave them a way higher price that we knew they didn’t want to pay, way higher than our competition was, and dumped that customer on the competition. Let them deal with stuff that they were forcing on us. You know, we’re growing, so we had the luxury that we could drop that customer and not have an effect on sales. But I do think that some – we’ve heard in other industries too of defensive pushback, and people who have really abused their suppliers and they’re paying for it now. Because their suppliers have had enough of it and they’re just walking away. So don’t abuse your suppliers. • I think your company is probably unique in that respect. There’s still tremendous competition out there and it seems like procurement departments kind of run the world these days. And so you can have a customer that, they’re sold, they want to do business with you and then it gets turned over to procurement. Especially at the largest companies. You know, just brutal and unrealistic demands, you know take it or leave it type. You can go around with them, and negotiate -- it’s painful. You’re worried about losing the business. Then we had a very large Minnesota based company that I felt did flat out extortion with us in an audit. And every few years they have an audit group, which are mainly contractors in the audit group. So I think they can kind of – well it’s a great profit center, we don’t know what goes on there and we don’t want to know. They come to us and examine every time sheet, every detail, try and find something and say, “OK, so this individual billed over lunch and you didn’t have approval to work through lunch (with all the work rules and things), so we’re going to take that times all your hours, and you owe us $150,000 on that issue.” And then, just everything they can find and, “You owe us a half million dollars.” • But next time you do business with that customer can you build that in your price? • Well, it coincided with contract renewal where we did everything we could in our contract to eliminate any gray areas that they could argue. But, just extortion and it’s (name of company) by the way. Unbelievable lack of right and wrong in business ethics. It was just a big money grab. • There’s enough competition out there in the country that somebody’s right there to take over where you left off. 174

• Short term, you think that. • There are certain distributors around the countries that we’re going to charge seven cents a pound more for cheese. And that’s just because their reputation of being SOBs. You know, every time you turn around charge you $100 for this or $150 for that. Our guy has to come out and say hi to your truck driver so it’s going to be $200. I mean, all that stuff you try to build it into the price. And eventually those companies get the idea that they’re uncompetitive on pricing because of their reputations. And then they try to clean house and try to fix their procurement. It’s always a great way to save money. It’s always to me a short-term thing. You know, it’s kind of like AP. If you try to stretch out your AP, well eventually you’re not getting good prices from your suppliers because they know you’re not going to pay them for 48 or something like that. So eventually you end up paying for it anyway and you don’t ever make money. You do for like a year or two. And then you end up paying more money than you would have before because somebody needed an accountant with an idea to stretch out your AP payments or something. It’s always short term. Now this might be a 10 year term, but eventually those companies do get penalized for… Let’s go to another issue: shipping and logistics. • There’re times, I don’t know if it was just weather dependent, this year we just couldn’t get trucks. Which is before I was in the beer business, I worked for my folks in a small company and we never had trouble shipping anything. And so I don’t know if things are tight, if it’s oil, if it’s what, or if just the weather because that was always often times, but that’s always the easy one to kind of blame. Wow it’s gotten tight. It seems like it’s just going to, I feel like that’s about to get way more expensive. • DOT regulations have really dramatically cut back on truck drivers’ hours. So there’re like 3 million truck drivers short in this country. If you’re not handling transportation, if you don’t have someone really dedicated to it you’re really going to pay for it. It’s just going to be more challenging. We just hired a trans alt manager. I mean we’re running trucks but we have to have a transportation manager to oversee all of it. Just to procure trucks, long term contracts and you know you have dedicated companies to haul the products. Yes, you always try to make money, but make sure you have the ability to move products. Lack of drivers? • They don’t pay drivers squat. • Is that what it is? Because whatever it is, it’s not working. • Then of course they can’t work that many hours a day anymore. Because they used to have two log books. People break that all the time so 175

they could make a good living, now they’re fixed, it’s electronic. • They’re tracking the GPS. • And part of it is they also did cut back their hours. Even if you had your ones that had log books anyway, they did cut back the number hours a day you could drive and the number of hours a week you could drive. How about healthcare? • It is way worse. It is up 33 percent this year, 27 percent last year. All we can do – I mean it’s hard to recruit. You’ve got to keep – you’re trying to balance keeping a plan that is affordable and yet provides you some level of coverage. But we cannot just continue to take the increases that don’t appear to be stopping. I mean medical inflation running at 3 and 4 times everything else. I mean, how is that possible? • You have to offer the employees a high Cadillac plan. Oh I’m sorry, there are only a certain few who get it. We’re downgraded. I used to buy a Cadillac plan. It’s not available to me anymore. You guys understand where that’s coming from. Or a very high deductible plan. You get a worker come with a couple of kids, or a third one in the hopper, you look at what they’re paying and they’ve got to self-insure. They’re deciding whether to buy groceries or gas to go to work. What are we going to do here? • When you deal with those challenges of 33 and 27 percent, most companies try to absorb because of the challenge of trying to have the benefit for the workforce. Your employees on the other hand, don’t realize the raise they just got, by the amount of money you’re saving them. They’re looking for a wage increase to offset that. • We’re very transparent in that we will lay out what we paid last year, this is what we have to pay this year. • They just want a raise. • This is how much we are going to absorb. This is how much you have to absorb. And try to give them options in terms of the way the plans are set up. To be able to – I can maintain my take home pay with this plan. I can see my take home pay go down with this plan. Or where can I actually get a take home pay increase by raising my deductible to $6,000 a year. • Right. And let them try to make the call from the perspective from what’s their individual situation in their family, or whatever it is, that will work for them. • We made it a very complicated business actually.

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FOCUS GROUPS

St. Cloud March 19

Gray Plant Mooty

Was last year as good as you thought it would be? Any surprises? • Our sales were excellent the first half of the year, best ever. Second half they slipped a little bit. We actually expected the entire year to be a little bit better than it was, but it was a record year for us, as far as sales go. • Same thing we experienced. We had a great year going in 2014. Toward the end of the year it tailed off but we still had the best year we ever had, but it tailed off. It’s not that it’s bad; it’s just not that good. It could be better, but it’s not near like the crash in 2008. This is a cakewalk compared to 2008. • We had a really good year last year. In the end, we relate the softness to energy prices and commodity prices. That’s big in Minnesota when you’ve got $3 corn versus $10 corn. There’s been so much pull up to North Dakota that it really started to soften with the price of oil. Now you’re seeing it with iron ore and closing the mine up in Keewatin. The good news there though is, there’s money in the consumer’s pocket, so I think they’re shifting the economy. Retail, restaurant, hospitality, and vehicles, and all those segments are still doing pretty well. But I think the industrial side of the economy is experiencing that softening related to commodity prices. Sponsor: Gray Plant Mooty 177

• 2014 was a very good year. The industries we serve have a direct tie to construction. They really took it on the chin. It took them some time to build confidence to go into their pocket and retool their business. That’s what they’re doing now. They want some semblance of a significant backlog to get their factories going. • So much capacity’s been added. Manufacturing’s been hot, a lot of our customers have expanded during the ramp up of the last two years, and all of a sudden you look back and say, “Oh, it’s not as hot as it was.” But then you look back at the data, you say, “Whoa, if this was 2012 or 2013 we’d be very happy.” But because of all the capacity available we want more. • 2014 was a good year for us as well, it was a record year. We saw growth in technical work so quickly that it’s created some growing pains for us. • We’ve heard analyst reports that Caterpillar revenues are going to be down around 18 percent this year. That’s not insignificant for the Minnesota economy. If you think about how many supply chain parts and pieces that are coming through here. That their cap order is down 20 percent this year, that’s going to have an impact on manufacturing. • That’s already taken hold in Eastern Wisconsin with some of the big metal working companies where they had x capacity and there was a lot of cap, and they’re trying to sell their machine in time because things are softening. • Corn goes down to three or four bucks. In the ag equipment business some companies are down 70 percent. If they hadn’t diversified they wouldn’t be here. The mining industry’s been flat for three years, and now it’s taking another hit because mining, ag, and construction equipment is huge down the supply chain. I think we should all be recruiting out in North Dakota because there’ve got to be people out there who wish they were back here working in manufacturing. That’s where I’d be running billboards. But mining, ag equipment— and ag equipment, by far is the biggest industry in Minnesota, as far as manufacturing. People in the metro think it’s med devices. It’s just miniscule compared to what’s going into the ag equipment and it’s really down dramatically. • That’s Deere too. • Oh, yes. • Deere is heavy in the supply chain in Minnesota as well. • The good news is, many companies say they’re too busy supplying Deere, and IH, and all of a sudden now have some time on their hands. That’s maybe a good time to invest. A lot of companies invested heavily during the last big downturn, so the ag equipment and 178

energy field are primed to make some investments that get ready for the—because nothing lasts forever. It always lasts longer than we think, but it never lasts forever. • One of the things we question is, what’s the trickle-down effect? We’re going to find out real fast. How many people are reliant on oil, energy and gas? When that slows down and all of a sudden you start feeling it, and the next people start feeling it, and we’re going to start seeing that. Maybe not now, but down the road. The other thing we always question is, the cap, the case, the oil guys, they pay the big dollars. They’re $20, $30 an hour guys, McDonalds is $10 an hour. People earn $10 an hour, they know how to live. People at $20 or $30 an hour are getting cut, they buy the four-wheeler, they buy the truck, and they do all the excess spending. When’s that going to catch up? What are you thinking about the economy this year? Do you think we’re looking at growth? Do you think it’s a flat economy? Do you think we might be looking at another downturn? • It’s not the good news for manufacturing, but I think just about every American’s got an extra $20 or $30 in their pocket right now from the gas tank. They’re spending it on retail, restaurants, hospitality, and travel. They’re not necessarily in the high wage jobs, but I think the economy can hang in there for a lot of the strength of that. The optimistic point of view. There may be some of that starting to come back around to what types of manufacturing get done, you know, vehicles, all those types of things, because the consumer’s feeling a little bit better, a little more breathing room than they probably did… • They just can’t keep up. One of the trends there that I wasn’t really aware of was that virtually all the food companies have said, “We’re not sourcing from outside the United States any longer,” because of things they’ve run into. That’s feeding some of that, along with the fact that people have to keep eating, and drive cars. • From our industry, I think we look at it as being flat this year. The industrial products are taking a big hit this year. When the gas prices go down, it’s like a lot of other things. Our products and our industrial products depend on the oil sands from Canada that require a lot of our products to take the fuel out of the oil out of the sand to produce that. Now, with the gas prices so low, that production in their view, the infrastructure really stops. So, we’re seeing a big hit there in the industrial side, but the municipal seems to be pretty flat. There’re a lot of bit jobs quoting out there and quoting activity is very good, but getting the people to commit is very tough, tough for them to get the jobs in. Our backlog, looking out, is much shorter than it usually is. Usually we can go out six to eight months, now it’s back a month or 179

two. Little bit tougher to strategize your plant. What about forecasts for your own company? A good year ahead? • The orders are not what they were. I don’t see a lot of layoffs happening because I think people just want to hang on to their good people. So, we’re not volatile, but we’re not the industry of 2008 at all. There are still orders coming in. We picked up some expansion and that cut our costs of operating. I think a lot of people are in the same situation, they just don’t want to lay people off and they’re willing to stick it out because to find trade personnel, again, is tough, and we’re just starting to figure out how to do this stuff all over again in this economy we’re in. If the commodity prices come around and they get into a commodity war, 2013, 2014 something like that, that’s escalating, and that changes the whole dynamics. We’re in steel and scrape. You can see that everything’s just gone flat, but nobody is really scared, but they’re not excited at the same time. Just sort of flat, a lot of blah. We need some excitement. You can look outside to see—I don’t know, I can’t see what’s coming on the horizon. • When you ask people what’s going to happen in the future, I haven’t really talked with anybody who says, “We’ll grow even more next year.” They’re very cautious and quite honestly we’ve seen that for a few years now where people in the mid-2000s became more cautious because they just felt that there were too many things that were unpredictable that could affect their business; commodity pricing, all sorts of different things, labor is a big variable right now. But I think there’s a fair amount of uncertainty like there has been. I think it’s just a different dynamic now than what we were accustomed to ten years ago, because of how things can fluctuate so quickly. The other thing that I’d say for Minnesota that concerns me most is I have never had so many people talk about moving out of the state, later in life. That’s something that concerns me from the standpoint that there’re a lot more people talking about it, there’re a lot more people actually doing it. I think these people who are typically moving to retirement or in retirement, and what they mean to the communities they live in, and based on how the tax rules are, they literally do need to move and, for the most part, set up their home elsewhere. It’s just not a play a game type of situation. I look at that and say we’re not going to know the impact of that for another five to ten years. We might regret the impact of that because we’re losing a lot of people who were significantly using the P&E, we employed a lot of people who understood how to do it, but they’re not going to be here. Because if they set up home somewhere else, we all know what it’s like, for anybody who’s moved, after a while, where you moved from is no longer home. That’s going to have a big impact on the state. 180

• If there were one public policy change to be made I think it’s the Minnesota state exemption not being aligned with the federal one that makes the biggest difference. If 1.4 million exemption versus a 5.4, you can easily pay for your domicile in the new state with just the lost exemption on the Minnesota side. If the public policy people in Minnesota want to hear how to stem some of this exodus, that’s the number one problem that we have. Most other states have figured out that they should align their policies with the federal policies, and that levels the playing field. You’re still never going to be Texas. You’re still not going to be Florida, but it’s everywhere else now. We’re at a disadvantage. • I think that is a valid point. It became more of a reality when the federal changed their laws, but what happened almost simultaneously is that Minnesota kicked up their income tax too. • Like a double whammy. • They’re going to punish you for being successful in Minnesota. • In these uncertain times you need policies that embrace people who are willing to take risk and create jobs, good jobs. But if those people are asking, why should I have my business here? People who have created wealth, who support the communities through charities, who mentor business leaders, they’re moving away. It will become evident in years to come. At that point in time you can’t turn back. • Look at the smaller towns around St. Cloud, towns of 2,0003,000 people. These towns don’t have five years. Their school districts are going to consolidate something terrible. There are a couple counties in the western part of the state; they have one school in the county. They don’t have the kids. I have four business acquaintances who pulled out of the state of Minnesota in 2014 just because they forecast into the future and it didn’t look like a future. Call it anything you want, these people moved out because they’re saying, “All right. State of Minnesota, I’m not going to argue with you anymore. Just leaving because you don’t listen.” We have a governmental problem, taxes. We are going to lose the future, I absolutely believe that too. All these metro areas aren’t going to see anything, but the rural areas—drive out there. Drive down to the sleepy towns of Minnesota. Look at the storefronts down there. • The guys who are left are the decision makers too—they’re the ones who are cutting edge, investors, they have the vision. Even if they come back for three months in the summer. They’re making the decisions nine months down South. People are actually leaving? • It takes 18 months to pull a plan together. You have to figure out 181

“Where am I going to live? What am I going to do with this domicile? I’ve got to move this? The kids are in school and we’re picking out schools down there, and communities” and all that kind of things. It doesn’t happen in a heartbeat, but when it’s done it’s almost irreversible. Let’s move on. What about shipping and logistics? Is this a growing issue? • You’ve got Greater Minnesota, get off the freeway system, and the trucking companies have no interest, unless you can get a full load. I hear that all the time. Get to Wilmot or Montevideo, places like that. You think you’re driving 3,000 miles, the trucking companies—you have to get full loads. We hear all the time about the cost of trucking, the lack of availability. We decided we needed to look a little further into this. Now, we can look at that on a regional basis in the state because they cut it up into seven districts. That was the reason, but the biggest reason is, I hear is that logistics is getting to really be a challenge for people. Obviously it depends on the kind of goods. If you’re making microscopic things that go in a box, that’s one thing. If you’re making big steel frames of some type you use these specialized flatbeds… • I do think there’s an unmistakable link though too, against how much oil is flowing across the tracks. • That’s true too. • That’s displaced grain, its displaced goods, it’s displaced every other thing underneath the sun. Some of the that’s going to be getting back here with oil going in the other direction, but I think that was a huge factor for transportation and logistics in the state of Minnesota. You couldn’t drive by Highway 10 without seeing oil cars going back, one way or another. That’s got to have a rollover effect on the commercial cost of trucking. And why they’re able to ignore those “less than loads” because they’re able—I think the transportation business just really tightened up because of that. • Just in the rules for the drivers, number one, the biggest thing we saw is—for my whole life there’s a one-day trip from Chicago to our facility. Now it’s two days. We’ve been trained one day. Now, with the driver it’s two days. You’re doubling the time you leave from Chicago. The whole supply chain is messed up. It’s not only logistics, it’s how they treating their drivers. They’re making it so people don’t want to drive. You mean the electronic records in this, limit on hours… • Limit on hours, the loading time is all in the hours, the drivers are going to wait, if they wait, they’re messed up. If there’s anything about the weather, they’re messed up. For us, they’ve got to get through the Cities 182

from Chicago to get to us which is half the battle. • We’re having two issues with companies that have LTL freight. They are looking at starting their own small in-house trucking companies to handle that, just to handle that. Because they cannot get it done any other way, and actually, are now starting it because of the terrible driver shortage. That’s just getting worse. By doing that, one of the things it’ll offer them is that they could be hauling everything. Most of those loads, because of the cost of transportation these days, you can’t go out more than a day’s drive time. They can offer that driver, instead of being an over the road driver, they’re at home driver. They’ll work for less and they’ll be more loyal. Okay, what about competition from foreign sources. Is that a growing or lessening concern? • Yes. Big deal. Most of our competition is European. The cost is significant to what they can do. • It’s all tied to the dollar? • And the Canadian dollar. • Would you ever agree to get paid in euros instead of dollars, use their currency? • I don’t think we’ve ever thought about it. • We just had a meeting yesterday with a client who’s not going to get the Canadian contracts because their dollar’s too expensive. • I think we’re becoming more aware of what it truly is. • Interesting what I’ve seen over the years. Bigger companies, they absolutely love overseas without a doubt. What we run into is that they’re buying product made in China. They’re making it in China and they have their own rules over there, what they follow. We sell to the American companies that are buying overseas. We have to abide by a different set of rules than overseas does. Our quality has to be better than overseas. Our delivery has to be shorter than China overseas. If I’m overseas and I pay for half on the overage and I pay the other half on bulk we get paid in 60 days. I think American companies are actually going out of their way to try to buy overseas verses buying domestic. They’ll cater to overseas, and there are different rules for buying U.S. made products. It looks like they’ll go out of their way to do it maybe because they just want to go on a vacation in China, or something, I don’t know. But, I don’t think that the playing field is even. Maybe there are advantages in it until these things come in, but the playing field doesn’t seem to be the same. We’re held to a higher standard. When we have to compete with a commodity item like coffee cups, we aren’t going to do that in this country. You can’t make coffee cups the way you can import coffee cups. But when you get into other products, we can’t compete because we’re on the same rules, I 183

think. Really, it’s a third world, really it’s automated. They’re just going to kill us. At the same time I think that the Chinese are going to have to change their system over there. There’s a lot of cost to what they’re doing, by the environment and some of these things. We follow environmental rules. American companies are so good in this country because they lead us, we’re green, and everything else, but they buy overseas. They can buy for less because they don’t have worry about cleaning the environment like we have here. The playing field is not equal. That’s our internal thought pattern. Well, we’re going to lose—the same thing around, talking about people moving to Florida and Arizona, same thing. People are moving out of Minnesota because it’s tough to do business. People are in the city because it’s way easier to do business • OEMs need to be challenged to work with the small businesses to figure it out. China makes it so easy to, “Take a widget here and make it.” Then you go and meet with the same person and say, “Hey I’d like a shot to do this.” “What? I’ve got to buy a complete—China does everything for me.” It’s not just the fan, it’s the galvanizing, and the painting, and this, and that, and the other thing.” “Well, what are you paying for from China to make help them make the target?” “Oh, I can’t tell you that. That’s unethical to share that price.” “Do you want to make it here in Minnesota and we can be next door to you? Maybe we need to work with you and a third party to get this done.” “Well, the guy in China he just does it for me. All I have to do is cut him a PO.” Are there more opportunities with OEMs trying to bring things back closer to home, homeshoring? • The opportunity’s there, but I think what happens is they give you a part, and you can’t do it on your own, you need to get a group together to do it. This whole, “Well, I’ve got a ton of things to do so I’m not going to worry about that.” and you say, “Well, can I get a chance?” and they’re so—there’s some pretty nice volume stuff we’ve seen in steel, going to power line poles, and a few other things, all sourced overseas, that we can’t get a chance at. They don’t have the time to work with us to build that supply chain. I think China, it’s so built up over there and people know how to manage it. But over here, we’re cutting down on labor; people aren’t being able to take the time to do it. It just is a struggle. We’re segregated, we’re not experts, and we need to work together again. You can’t do it when people want to stack the margins so we can make a buck. All of a sudden you can’t close the gap. How are your overall OEM relationships? Is price taking over? • It’s getting pretty hard for new companies starting out. You just don’t 184

pick up the phone and call the purchasing person from the company. You have to go through hoops and everything else in order to get qualified to keep track of everything. Then information technology has changed the way we do stuff. It’s harder to find the person who’s the really the decision maker. You look at the website and you really can’t track some people, and then again, if you’re not using the website right you’re not going to get into a company. • I see some trends that American Made is still a badge of honor around the world. There are opportunities in that for specially engineered products, and industrial products, and products that have to perform across time, and across years. I think that’s a real strength for the economy, and the reputation for American quality is still good. I see patches of that in various companies and industrial products, still being able to move their products into the rest of the world and have a great reputation and we’re doing that. I think that’s still a strength in the American economy. • Going off there with that, we’re seeing exactly that. We’re seeing more on-shoring. A lot of what we do is sub-sealing oil and gas. The technical welding and machining, that quality has to be there. On top of quality is traceability. You’ve got to know what materials are in there, who touched it, and everything. • The stuff that we’re building you know it’s right the first time because it’s down there for 25 years. A couple of our competitors were over in Asia, in that area, and we’re seeing, on touring, that they just couldn’t hit the quality that was needed using the right materials and everything. Granted that is kind of a niche market, but that’s one example. • One of the things I know people do is they struggle to find the supply chain here. These brokers, they set up all these relationships for overseas. They make it easy to buy from them. We’ve gone to companies and they’ve said, “I’d be willing to consider anything made in the U.S.” for the last 20 years. I’m being told I should find somebody. Where do I start? You look through their factories and they say, “Well, maybe some of this stuff is good, and maybe it isn’t.” “Well, I’ve got 18 months of supply here because that’s how much I had to buy to get it at the volume.” And you say, “Well, I’ll just come back in 12 months.” Between now and then that’s a long time. We’re not set up to wait that long. You go on to the next thing and when it actually comes around, do they remember to do it? Do they want to do it? I think part of it is people want to try do it, they just don’t know how to do it. I think it’s starting to come up because we see the same thing. You see it in importations, inspections, all that stuff as we go along. We have to put more people in to monitor that now and the paperwork, traceability—we never had to do that five or 10 years ago. Now, if you don’t have it it’s a big deal.

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Let’s move to another topic. How have the costs of employee related healthcare evolved as a challenge to your company? • In our companies that had good experience before, they got big increases. Some of our companies that had bad experiences got cuts. Because of the way the risk coding works right now companies that are sized under x, they can’t look at experience in rating those companies like they did before. You feel like that’s a little step backward on the one hand. On the other hand there’re winners and losers in that. But what I would say about that, in general is, a lot of the uncertainty that was there around healthcare; how is this going to get implemented, now that’s it’s been in place for a couple of years people are figuring that out, and there’s some of that uncertainty coming out of, will there be an exchange, will there be an option for employees. Because if I give them a subsidy to go buy that, and they are actually able to go buy something on an exchange. So, I think some of the uncertainty is coming out around health care. I’m not sure all the incentives are still in the right place because the disaggregation of the experience around “fix the price” mechanism impacts small employers. • Yes. It’s getting more and more expensive as we go through here. • For us, the cost has stayed relatively flat for about seven years, but it looks like it’s going to skyrocket in 2015. We’re right in that range of pay or play as far as the size of our company. We see it as a big concern for 2016, but for this year and the last several years we’ve been able to hold ours at a reasonable level. • Just in general it’s hard on morale. You’ve got to deliver the message that it’s going to be x, “Well, I can’t afford x.” and “How come you can’t cover x?” On one hand, “I think I can understand that things are more expensive, but why do they have to be more expensive for me? That’s my money.” At the end of the day that everybody learns about it, the morale in the organization takes a hit for everyone. • That’s the $40 a month you save on fuel and gas. • You have to pay a higher deductible, right? • I think the cost is one thing, but when you get to morale the average guy doesn’t understand. Not only do they not understand it, nobody’s there to tell them about it. Our HR people spend more time with our employees on non-work related stuff, explaining deductibles, talking about deductibles, explaining HSAs, talking about HSAs, one can’t afford the HSA, after tax, pre-tax, you’re only going to get six, seven dollars more on your check, and we have to spend so much more time explaining this to the employees, and that’s usually when they come to us, after they spent the last 20 minutes out in the plant unloading on somebody else that, “This isn’t right” or “The company’s ripping us off.” It has nothing to do with us. So, when you talk about morale, it’s the people out there that are barely hanging on, now they see this, it blows up at them, or they don’t understand when they get the bill 186

from the insurance company it’s just a statement… • “This is not a bill.” • You don’t have to pay us. Then they actually get the bill and they can’t figure it out, they don’t understand it, maybe, “That’s not right,” who are they going to call to fix it, they can only do it during daytime hours, which means it takes away from their job. Now, instead of worrying about what they’re doing for us, they’re worrying about something they don’t need to be. It’s tough to foster the environment so they don’t wonder about that stuff. Price is one thing, but the morale is—this is the first year I’ve noticed that a lot more. Finally, the skills gap has been something this group has talked about before. Is it getting better or worse? • For us the management—we’re rural Minnesota—management is much more difficult than manufacturing positions or blue collar positions. We’re not skilled. We aren’t looking for welders or machinists. We’re looking for assembly people and we have no problem finding those, but from a management level it’s really difficult to find. • I was at a business this morning. They’re looking for entry level manufacturing, looking for welders, and looking for “good” people, that’s how he described it this morning. I asked him, “How is the labor for your company in the last 12 to 18 months?” He said, “It’s never been better.” I said, “Tell me more about that because I don’t usually hear that.” He said, “I had an “aha” here in the last, probably, six to eight months.” He’s got a brother who runs a number of farms and his brother was working with, you can call them migrant workers, they’ve got their citizenship here. They move them up from other countries and they’re working for him. And they’re bringing the families over. This guy who runs the farms is getting great labor. When he started he told his brother, “If you see a few that you think could work for us, could you send them my way?” He said, “I’ve got four people here that would....” He said, “Young, white, males, we let them go because we bring these people in here, and they are loyal, and they make sure they take care of what they need to do, they’re responsible, they show up for work.” And I thought, that’s interesting because you hear a lot of diversity discussion around and how it’s working, but in this situation he said, “It’s amazing. I’ll take as many of those people that I can get.” Now, I don’t know exactly all the background of where they’re coming from or anything, but that’s one of the first times I’ve heard that. And he said, “A young white male? There’s a huge variable there. They’re going to be loyal, capable, and want to work.” • I think that one of the best things that The State of Manufacturing® has done across the years is focus the issue on skill matching. It has penetrated public policy people because it can be an across the aisle 187

issue. It’s education, and both sides—the right side of the aisle can be thinking that it’s a capitalism issue, the left side of the aisle thinks it’s an education issue. It is one thing I actually think people can cooperate on. The public discourse on this is good and I really believe that The State of Manufacturing has raised the discourse on that and that the educators have upped their conversation to business people, and business people have upped their conversation to legislatures. That’s one thing I think I’ll congratulate on the outcome of this; the level of discourse on education and skills training in this state is far better than it was a decade ago. • Yes. It’s region by region and you’re going to have communities that know how to work better together than other communities, but there are models of it that are working out there. How are retirements affecting workforce issues? • We are seeing that. That’s why we’re looking back at the tech schools more, like machinists. We’re trying to get those on board sooner too. We’re bringing on more than we have in the past to get ready for this exit. We’re trying to talk to these people more than we have in the past, like, “What’s your future plan, what kind of years of service?” and kind of get the feel from them. People are pretty open to discussing that. So, that helps us prepare for that, and then pulling the students from the school, there’s going to be a gap though that’s going to be tough to fill. Have you formalized the process of transferring that knowledge? • I think we’re aware of it for starters. In the past somebody would retire over a discipline or piece of knowledge that doesn’t come up very often and then we try to produce something, “Wait a second. How did we do this? Who knew how to do it? Oh, he’s not here anymore.” So, I think it’s more up in the air because the pace of the transition in technology is accelerating. We’re not doing the same thing for ten years. We’re doing the same thing for a much shorter period of time. • Those guys retire and they took 30 years to get that knowledge and with the new guy, there’s not that much overlap. You hire a rookie it takes two years to get to a level where you can make him good, then two years, do they want to be here, or jump ship? Do you balance those cycles out? How can you keep them from moving on the path up? Two years to them is like five eternities. With the old guys, an eternity was 30 years. • (laughter) • It’s a big deal because even the guys on the plant floor, they know how to make things happen. Engineers know how to do it. When you lose that, trying to compensate for it before they’re gone, it’s tough. • I didn’t realize it’d be so tough for me to leave.

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Willmar March 19

Ridgewater College

One of our U.S. Senators used to say that when agriculture hums, everything hums in Minnesota. Is that still true? How reliant are you on agriculture in this market? • I think for me, since our business is primarily agricultural equipment, it’s a significant impact on us and we track directly with probably lagging a little bit the ag market, but we track directly with it. • We’d say we’re definitely – when the ag market is up, our business is up and when the ag market is down, our business is down. • Ninety percent of what we do is definitely ag-related. To some extent, we make parts for hog buildings and different parts and pieces; we do a lot for Jenny-O Turkey Store. We do a lot for Hormel Foods. We do a lot for basically anybody that’s ag-related. Our process piping goes in with our milk producers, so everything that we do is pretty much ag-related. • We’re very reliant on the ag industry, especially from our supplier standpoint. The ag industry has to do well, we do well. That all comes together, but our finished customers frankly, there’re not as many people in agriculture living in the rural areas as in the past. So, our finished customers, when you say “Is it ag-related or not?” It sure is, but you know we sell a lot of food in the metro areas throughout the country: West Coast, East Coast, Central Southwest and things like that. If the ag industry isn’t Sponsor: Ridgewater College 189

healthy, then we’re not healthy because we’re a central part right in the middle of it, whether it be the base products from the corn and soy beans and those types of things to our finished goods. So it is very important to us. • It really wouldn’t affect us on a personal level. Really, it would be more on an industry level where we’re manufacturing advertising for food companies. If the price of commodities is way up, cheese and milk, that might affect how much General Foods or General Mills have to spend on advertising so then they might tighten their belts a little bit. So on a bigger level, broader level that might affect us that way. • When the ag economy is strong, it’s good. But it also certainly can affect input costs. That comes into the input costs and yet we want – we need – strong turkey prices, but when corn prices are up, that does affect our input cost, but on our overall balance, Don is right. When the ag economy is strong, it’s beneficial. • We don’t necessarily see the agricultural industry directly as a big part of our business, although when farmers and others related to the agricultural industry are doing well, they’re building, they’re buying concrete, which we provide products for. So indirectly, we see the benefits of that. And when that grows back, when commodity prices do go down, well, then we see everybody tightening up and that sector of our business kind of shrinks. So overall, the agricultural industry as I see, with us serving it directly, is maybe eight to ten percent of our business. Indirectly, it’s hard to put a number to, but yes, like everybody else, you notice it. What’s going to happen in ag? How do you plan for it? • From where we’re sitting, we see it as improving, we’re seeing healthier financial statements, but I say that with caution because I think we’re kind of sitting at the edge just waiting to see what happens, just wondering where things are going to go. • We’re heavy into the ag lending and the manufacturing lending. I do think there’s potential for a little dropdown here in the economy. • We diversified a little bit, so we’ve been taking on services for different companies, basically. We’ve found a way to make the same parts that they make cheaper than they make them, better quality. And faster, basically. Anytime you can cut costs for somebody else, you’re saving them money and it’s kind of trickling. I hate to use that term trickle-down effect because that’s never a good thing. • We’re expecting five percent top line growth. When you say the overall economy, I will tell you deliveries on capital equipment and things like that are stretched way out. Manufacturers throughout the country, their fault. Now, they may be a little bit restrained in what they’re adding in capacity, but I can tell you deliveries on things are out a ways, and they’re stretching. 190

They’re getting longer rather than shorter. • We didn’t really see any strong growth. I see us just kind of holding our own again for another year. We have dealers and representatives across the United States and Canada and Puerto Rico. They’re thinking about moving again. They would really like to see some strong indicators of real, true, substantial, sustained growth throughout the nation, not just in their area, but across the United States. So they feel more comfortable in making equipment, and they can go to their banker and get the dollars they need because of the potential for the future. When you think about growth is it from an existing base of customers or from new products, or new markets? • Growth that we’re going to see is putting in new equipment and adding on to the type of operations that we can offer with our existing base of manufacturing. So we’re going to dig deeper into the current client’s pockets by offering additional capabilities. But the base of product that we’re selling isn’t going up, it’s just we’re getting more – like I said, we’re digging deeper in those same client’s pockets. • The successes I’ve seen during the downturn of the economy are those people willing and able to find that diversification. When the housing market crashed, they could diversify to say, maybe food grade industry type services and products. I shouldn’t say services. Products. So, in those cases, there’ve probably been three or four companies that I’ve seen when things take a dip here, they push more for this market, kind of like they’re doing. Is anyone planning to expand your workforce? Are you looking for more new people? • We’ve hired four in the last six months and we’ll probably be hiring another four in the next year. But part of that is because we’re adding on that new equipment and we’re going to need additional support people besides the current operators that we have for our current equipment, so that’s where that expansion on the workforce comes from. • Nope. Not this one. In Minnesota though. We’ll be in Minnesota. As you assess your employment needs, where is your biggest concern? Four-year degree types, people with some technical training and some experience, or is it in just entry-level workforce? • The answer is yes. • All of the above. • (Laughter) • The answer would be yes to all of those. We hire a lot of people. While the economic downturn was not desirable, our hiring was easier then 191

because we were still hiring, we were still giving increases. We didn’t lay people off and shut things down. So we had a much easier time hiring and now almost everybody else kind of ramps up and the labor pool is definitely cut and go, I think in the last twelve months specifically. We have – sometimes we have a great candidate and we’re lucky to get one. Then other times we have openings that go for a while because we can’t fill either – supervisory openings are hard to fill. Technical openings, like maintenance are hard to fill. CDL drivers are hard to fill. General labor positions are hard to fill. Machine operators are hard to fill. • In fact, I believe a couple of my people were out here this week talking with Ridgewater to work on some of those technical jobs where if you can’t fill them, try to build them. • I was just going to say that if I look across the manufacturing programs that we have at Ridgewater, so welding, machining, automated systems robotics, which crosses the boundaries of maintenance, computer-aided drafting and design. All these programs are seeing an increased number of inquiries for our graduates; there’s a strong market. Probably 60 percent of our students in these manufacturing programs are working at least parttime in a manufacturing job while they’re going to school. Of all of them, the program that I’ve got the toughest time meeting the employer’s needs is in the automated systems robotics because they’re seeing more and more manufacturers going to increase automation and process controls. So as soon as these guys or gals get anywhere near graduation, they’re looking at getting out the door. • We’ve got two students who will graduate either this spring or in early fall who have just landed full-time jobs with 3M. • We find at the college in our technical programs a lot of students interested into getting into welding because they can get out in about a year and get a decent job. But I think it’s because they see and they hear more about the welding jobs than they do about the automation/mechatronics jobs that are out here. So they don’t quite understand. These are very high-skill, high-knowledge jobs that are all about truly understanding programming, the computers and the equipment to make sure that they operate as efficiently as possible. • The entry-level for somebody out of our automation program is probably $25 - $28 an hour. • What you were talking about is – what do you think? • Ten less that. But I think, unfortunately, people tend – I always hear from the colleges that during good times, it’s harder to recruit because kids want part-time. They want that work because they want that $15 an hour. During the downturn, their jobs weren’t available so college was more appealing. I mean, we hear that all the time. I don’t know if that’s consistent here, but I suspect it is. So during this time, 2.3 percent 192

unemployment, if you can go out and get a job at $15/hour, what’s the benefit rather than going to school. The other thing we hear a lot is manufacturers asking for non-degree – help us get the kids started and then try to figure out how they can have flex teaching, which it sounds like they’re running into that too. • And I think too, where we run into trouble filling the workforce needs through our degree programs and diploma programs is where – like it was indicated, folks from Ridgewater say, “Okay, well, we’ve got a group of people. How can we skill them up in a sense to do something more advanced?” Or help us get more entry level people – just give me somebody, get them started, get them some basic skills. So there’s been a lot of interest from folks in the industry talking to us about not only how can we continue to build more of a pipeline through your credit programs, but how can we take people who are going through those programs or people I might have here and get them some level of skills to get them into these jobs where we need people. So we’ve started getting very creative in how we’ve done that and they think there’s some good potential with some of that to help, again, fill those jobs. It’s a different way to fill them, but they complement each other well and work very symbiotically. We hear a lot about the soft skills problems among workers, especially younger ones. • It’s a huge issue. • Well, in our field we have welders who’ll come in with little to no experience and we teach them what they need to know and they get the skillset and then once they have that, they obviously look around, find a job that pays better or has better benefits and then they just do the jump. They’re always chasing the almighty dollar and once their skillset gets to that point, then they move on. • We’d go on our job sites and there is high demand for welders right now. Always has been in the last few years, but pipe fitters and stuff for us are really hard to come by and I’d go out on a job site and I’d work for one company and I’d legitimately get offered a job from another one at almost $10/hour or more. So it was hard for me not to say yes to them, but at the same time I have to maintain some loyalty to this company because they’re the ones who hired me. But if they’re willing to offer that much more, then guys are willing to do it. • I think we see the same thing with our welders and CNC operators -- a continually revolving door. We almost always recruit for those positions. On the salary side we’ve never been able to get up to our head count that we needed salary. Most of it has to do with we can’t bring in anybody who is experienced. So we are always bringing in an entry-level person, training them up to a certain place, even in the salary workforce, and then whether 193

it’s something that holds them there – it might be relocation benefit, ties, or something that will hold them to the position for a while. Soon as that’s done, they’ll move on to somewhere else for whatever reason. We have a significant issue with recruiting both in salary and also in hourly positions and specifically welders and CNC operators. • And not to generalize, but I think the other thing is the expectations that the younger set has about coming into work. I don’t know if it’s so much about loyalty or that, it’s just “I don’t want to do that. I don’t want to work second shift. I don’t want to work a lot of weekends.” They come out and they think within two years they should have a promotion. Or three years, “I’ve been here three years, I’m stagnant.” • I think there is that different set of expectations and then those who are really in charge are not from that generation and so there’s that conflict of expectations about how the workplace should be going. When I started, you work what you needed to work and if you needed more Saturdays, you work Saturdays and you just do what you needed to do. It’s a different mind-set with that generation. Not everybody. How do you cope with that? • Well, we try and find strategies, maybe a combination of meeting that. If we take a hard line and say, “Nope, it’s our way or the highway,” then they say, ‘Okay, we’ll get the highway,” and then we don’t always get to keep people. But on the other hand, “Yeah, if you feel like coming to work today that’ll be nice.” We can’t do it that way either, so I think there’re different things that we’ve tried to do to make sure that we accommodate that expectation. One example, we made more vacation days available sooner to people. They don’t want to work ten years to get whatever. So that’s one thing we did recently was made a few extra days available sooner in the vacation schedule because people value time off. Did it work? • Hard to say. Can’t tell if it works, can’t tell if it doesn’t. You don’t really know if that made a difference or not, but it seems to be appreciated. • We actually sent our crews up to a nine-day on, five-day off schedule. We have installation crews that go out onsite all over the country and they put in manufacturing equipment, food-manufacturing equipment to be more specific. The big thing for those guys is obviously, number one is money. They want money. Well, we can only build so much, so there’s only so much wiggle room in there. The second thing that they look at is time off. So, when you work on the road if you can keep them on the road for nine days and they come home for five days and they have that time off where nobody’s bothering them, they’re not checking emails, they’re not doing any of that stuff. It’s their time. So that’s how we’ve been able to 194

retain our field installation crews, just by doing stuff like that. We’ve heard some nervousness about impending retirements. Do you agree? • I have 32 employees in one facility -- almost half of them have 20 plus years of experience, so within the next ten years, I’m going to turn over all that institutional knowledge that you talk about. It’s a huge window that’s closing as far as being able to find the right people to transfer that institutional knowledge to in a short period of time and finding the right type of people who aren’t going to leave after one year or two years. • Well, we’re trying to document our processes a lot more, but because we’re growing. That takes time to do that too and you’re still trying to get the same increased number of widgets out of the door. Getting back to your point about the other generation, one of the things that I try to do is just involve them as much as possible in some of the decision making. Even though you’re probably not going to put as much credence into their opinions on some things, if they have input into it, they seem to have a little bit more ownership. So you’re involving them in some of those decisions and hopefully to them it gives them a challenge so they’re working there for more than just a dollar. They’re working there to be part of it. So you try to create that environment and see how that comes. Let’s quickly go through and discuss a number of challenges that annually confront Minnesota manufacturers. How do issues around logistics and shipping affect how you do business? • Dramatically, yeah. We see – we don’t handle our own shipping. In our company we job that out, but we’re seeing much like with the shortage of truck drivers, CDLs and so forth. Just the heartburn, if you want to call it, getting trucks in on a scheduled basis so that we can manufacture and while, granted, we have room for some storage we can store for a short period of time, but it’s getting to be – I’ve seen in the last several years, it’s more and more of an issue, whether it’s a tractor-trailer or just a one-time truck that’s used to pull our equipment. But getting the driver in, shipping on a timely basis has really been a challenge. We’ve learned to stretch out and look outside of where we normally get our services provided, but it’s still not gotten better. • I’m trying to be very intentional. Well, we do shipping internally with our own inputs, and then we do shipping, of course, to our customers and I know the supply chain areas are very intentional about maximizing what goes on a truck to maximize the cost. Truck drivers are a shortage and of course our products, they can’t be late, they have to be there on time because they’re perishable. And so we have some constraints that way and I know they actively work on that constantly. 195

• We went out and we bought some trucks and lawn trailers and stuff like that and we just provide our own delivery and our own pick-up for everything that we do. But another large company that we do work for is having problems. We couldn’t get the product back and forth. Quite frankly for them to produce it at their own facility was costing them a lot of money. Now, we’ve run into a logistic problem, how do we get it back and forth? Do I wait on a driver from Joe’s Trucking to show up here and get it or we just provide our own? So we added our own to drive our own truck and we started driving it back and forth at no extra cost and boom, your product gets there on time, our product gets out of our way, so we can start on the next project. We rolled over on a percentage. By providing our own logistics, we made our company more appealing because we do it. • People like that. If we’re going to make product for you, we’ve got to find a way to make it better for you. Do you have issues finding drivers? • None. We’re a family-owned operated business so we have a lot of people who can drive our equipment. Then we all kind of pitch in and make it happen. Like I can see down the road that we’re going to end up having more cost involved in that, but it’s something that is a necessary service and if you don’t provide it, you’re going to get left behind. Is yours all internal? • Well our finished goods, outbound shipments, we normally don’t have a problem there. We do have an issue with logistics inbound. That seems to be our biggest issue. What we did recently was they centralized that in our corporate office so that has helped us immensely. They’ve done things like put in crossbox in certain places. We would have trouble getting people to come out to Vincent because it was basically a one-way trip and back empty. There was no return load. So that was an issue for us. So they centralized the function because other plants had the same problem and putting cross-box and other thing to cube out the truck so that they don’t come on empty and that sort of thing. How about identifying and training future leadership from within the company? How much of an issue is that? • We have a formal program in which we do that. You recognize people and then there’s a program which they go through. That’s corporate wide. • I guess our business is a family-owned business as well. I’m not a member of the family, although I’ve been with the company and I’ve seen all three generations. It’s not written in stone that the next generation is going to be the leaders of the company, but they are certainly looked to, to present role models to set the examples and set the tone for everybody 196

else, the other employees. Yes, we anticipate that that would be the case that they would be able to step up and fill those vacancies when they show themselves. All right. Let’s go to the cost of providing employee health care coverage. • That’s huge when you’re sitting down and you’re trying to calculate starting wage for somebody or yearly increases. When you see 14 to 22 percent increase in health care costs, that’s huge. You don’t want to take away those things, the 401(k) matching and those types of things that you’ve already given to them, that you have in place, but how else can you offset the cost to the company with the increased health care cost? It’s always a challenge. I don’t know that that’s going to go away anytime soon. I think we’ve just got to get more creative in how we approach or how we think about that. We’ve talked about some different ways of instead of providing group coverage, maybe instead we will give you ‘x’ number of dollars to go and find your own coverage because the group plans don’t seem to have any benefit anymore. So things like that. I think it’s something that everybody struggles with and will continue to. • Well, with the Affordable Care Act, you have to deal with it now. It’s on the table. • It’s on the table and it can’t come off the table and I think you have less flexibility in designing a plan that works for your workforce and your company’s needs. The Affordable Care Act was described as a race to the bottom for people that had – then they added different things that you had to do and so “in order to do that you can’t do this” type of a thing. We’ve made decisions within our health care plan, again, things that we would rather do differently because of the Affordable Care Act. It’s increasing and it didn’t really level out the playing field with exchanges. Everybody thought, “Well, those who offer benefits and those who didn’t kind of level out the playing field,” I don’t know that I’ve seen that so much. But it is a significant cost. We spend a lot of money on benefits, health care and retirement and all while trying to maintain a broad safety net of benefits so it’s not just a health care plan. It’s retirement, it’s this and it’s that. It’s exceedingly expensive to do. Is it a negative in terms of HR relationships? • I think so. I think we’re pretty intentional in our communications and do meetings every year and explain to people how we got to where we got to with the benefit plan, the changes that we made and why we made it. Some years we’ve had bigger jumps in the premium cost and other years, not so much because we didn’t have to and so we try to explain that. It takes a lot of effort to do that, but we’ve had pretty good luck, I think, 197

explaining that to employees. • It’s always a challenge. We have a fair amount of government contracting work and just the absolute loopholes you have to jump through to get anything off the ground with them. Keep in communication with them constantly to try to keep up with whatever the project is at the time. If I was to say – I’ll use Jenny-O as an example – if I was to want to get a contract with Jenny-O Foods, it’s this one. If I’m looking at a contract, anything with government contracting, I mean, it’s a pack of paperwork that thick. It just takes a lot of time to deal with, it takes a lot of effort to deal with and there’re a lot of loopholes.

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Alexandria March 20

Alexandria Technical & Community College

Enterprise Minnesota has focused a lot of attention on how the Alexandria community addresses workforce challenges. Let’s start with that. What’s the biggest challenge, attracting or is it retaining employees these days, for you? • If it’s machinists, it’s probably the most challenging area. • For me, it’s getting better. I think I’ve realized the need to have to keep them interested, a lot of that need is monetary. I’m not going to expose myself to weakness. I’m going to make sure I’m offering very appropriate salaries and looking at it very often using as many surveys as I can from the area. For other people it’s probably the same challenges but probably not quite as challenging because we’re heavily relied on CNC, so if we look hard enough we can—we usually have to grow our own operator. But our business in glass and ceramics is very specialized anyway, so you find someone that’s got good value sand invest a lot into training. How much of a challenge is it, after you grow your own even though they are specialized that someone else will just cherry pick the produce? Sponsors: Alexandria Technical & Community College, Alexandria Area Economic Development Association 199

• Besides the machinists, we have a pretty good retainment for our operators. • It’s real interesting. There are less than 600 people in Douglas County that are available for work. And of those people, they’re not all desirable or even available because of some kind of an issue, whether it’s daycare or transportation or whatever. There just aren’t a lot of people. • I think that if there’s nobody to recruit from and as each one of us grows, people are going to be doing different things to attract the good people. And I think that we’ll be borrowing from one another. I’m concerned about that. • Which is something that we haven’t really done and but now I think it’s starting to happen. • I can speak for the packaging industry in the area. We have very few general labor positions. Most everybody’s required to have some level of technical ability and preferably education behind it. We don’t typically have a lot of four-year degree individuals, although we have some. We all require kind of the same core skill sets and we all have the same functional areas in our businesses and when there’s just nobody out there—that 600 people, there’s not a designer, there’s not a mechatronics grad who’s not working, there’s not a machinist who’s not working. So what happens is, and we’re all hiring, so I don’t necessarily go and cherry pick from (other companies) but I have gotten a few people recently that have applied to openings that we have advertised for as well as from other companies and some of our people leave. So it’s really very much an employee market right now. They can go wherever they want. I have a machinist who wants to come work for us. He’s been working at (company) for eight years on the second shift and there’s just no opportunity for him in his foreseeable future to get off the second shift and he’s a young guy. He’s got a family and we have a day shift opening. I don’t want to take that guy away from (company) because I know how hard it is to replace him but we have an opening, we have needs. So as much as we like to say we’re not going to compete with each other, if somebody voluntarily comes and applies for an opening we have, we’re going to talk to him and that’s just great for the employees but overall that’s not helping our local shortfall at all. We’re just shuffling the deck. • And so then, again, back to the packaging industry, then our overhead goes up, our costs go up, so now we all start pricing our machines higher to compensate for that. And so it’s just inflation. So what’s the solution? • Well, it’s going to have to be more than just area high schools because of our demographics. And we look at demographics all the time, particularly since we’re seeing declining enrollments for many of the 200

same reasons that you’re struggling to get employees. The birth rate is just simply down. We just have less and less people in the K through 12 pipeline who are going to graduate. And actually almost close to 50 percent of our enrollment are non-traditional students. They’re adults and we’re going to continue to see a decline in high school graduates coming to college, not because they don’t want to go to college. They’re just not there. So, yes, we’re going to have to look at—and that’s going to put us in competition with the 30 other minuscule organizations because we’re going to have to start recruiting from a larger area outside of this region and that’s going to have an impact on us, as well, so we face many of the same issues. • We have a manufacturing consortium, a group of companies that get together and we meet regularly and we’ve talked a lot about this. We’ve concluded that there are three approaches. One is to develop the youth and grow the next generation of—and we’ve done a lot of that with building out a fantastic new high school and exposing kids to manufacturing as well as other career fields, developing the underemployed people. But, again, if there’re only 600 people, how many of them are really available and have the ability to be developed into a more of a technical worker? I don’t know. So that would be the other thing and that would be creating centers of learning or doing boot camps or apprenticeships or whatever, all those things. And then the third thing is to try to get people to come here from outside the area because that’s the way we’re going to stop stealing from each other and because when we all steal from each other the net result is zero. I think we’d rather compete with graduates than compete with current employees. • So bringing people from outside the area, which is very difficult, you have housing shortfall issues, we have any number of constraints doing that but those are really the three approaches. And then there’s the fourth one and nobody likes me to ever say this but the other one is to send the work out of the area and that’s a very real possibility. We just talked about it at our leadership meeting this week. We can’t get designers. We can’t get machinists. We can’t get assemblers. We have all this work. We have more work than we can do, so you’ve got to find somewhere to get it done. • You’re talking about outsourcing the work? Yeah, because the other option is you have is to continue to expand automation to reduce the lines of people and one is—the other two are looking to acquire a facility that’s underutilized in an area that has more than 600 people over a broad base, almost 38,000. And the other thing you do is you re-rationalize your business and you say if there’s too much resistance to getting bigger, then you focus on getting better in terms of what your offerings are and rerationalizing your customer base and saying, look, these people here are 201

disproportional to what resources they take for the services they require. They really don’t justify me expanding my facility, expanding my employment base, expanding my problems. And so time to find a new place for that work, not served by us and making sure that you’re really taking your finite resources and dedicating them to your best customers who have the highest needs that you’re meeting and so there’s the most value created and so the margins are the best because better, not bigger is also a strategy that you can take when there’s too much resistance to getting bigger. • Are you currently constrained by the ability to find well-trained employees? • Probably not as much as other companies here because we’ve had an internal training program and leadership development program at our company for over 20 years and we probably bring on more unskilled entry-level people and elevate their skill sets with skill bundles that allow them to contribute more, make more, do more, create more value and have a career. A lot of the companies here need people that bring some sort of technical training or experience on opening day. And so I think from that standpoint, it’s less so. So when you talk about is it recruiting or retaining, it’s recruiting people you want to retain. I mean, it’s kind of a diamond in the rough process, finding those folks and then identifying them early on and making sure that that’s how they’re developed within that organization. But there are some times where it’s—so we’re getting impacted by—we’re not defeated by it but we’re slowed down by it and so I’m kind of looking at—we’ve done a lot with automation. It’s harder. I think if you’re more into small batch sizes, short runs, automation’s tougher than if you’re making long run type, continuous flow sort of process and a lot of the companies here in this area do a lot of highly customized manufacturing. But I do think that it’s sort of moving to a point where it’s going to become decently hard for manufacturers in the area to grow. What about retirements? A problem? • We, fortunately, are not that old of a company, so we don’t have a lot of that. We have a few here and there but it isn’t a concerning amount or rate. So we’re a fairly young company. • I think I would speak on behalf of (company) on this one. There are a lot of older people on that staff. I’ll be curious to see how this year pans out because it is employee owned and there was another 25 percent gain in stock price this year. And so I don’t know how much that will drive but I know that they’re trying to come up with creative ways on how to attract talent to replace reduced talent. So we don’t have that type of concern at (company). Today we’ve got 20 students coming in from 202

Hillcrest Academy out in Fergus Falls and we’re going to show them all the inner workings of what types of career opportunities there are in Alexandria in the hopes that we can send them out to their appropriate college and they’ll come back to Alexandria and make a career here. And so this is a cross section of talent. And then at 1:00 they’re actually coming over to Alex Tech to tour here, so we’re going to be trying to push them into some of the careers here and we’re repeating this again with Battle Lake come April, so we’re going to get another crew of people there. Have you had some luck with that in the past or is this a new program for you? • No, we’ve done this in the past. We’ve reached out to different schools and it’s amazing, once you get the ball kind of rolling, it’s kind of funny how people have come out of Fergus Falls and Battle Lake for us, just a small community. And because one guy picked up on it and he spoke well about it, now the next guy and so we’ve got three different, not generations, but three different classes worth of people who are interested in us and the ball just starts kind of rolling from that. These people who are hands on don’t really realize that there are these careers out there. And so giving them exposure in industry to show that it’s a clean work environment, bring them over to Alex Tech and say, hey look it, this is where you go to school to get this type of education to come back in. And so we’re trying to use the school system because we’re aren’t necessarily set up as [name] is set up where you’ve got in-house training capability. Maybe they’ll come some day for us as well as we get bigger. • We run the manufacturing days where we, by the time this school year is done, we will have brought in over 1,000 high school students to the campus for various manufacturing days where they come and they spend some time here looking at programs but they also spend time out at an industry. And I think we’re almost over 1,000 at this point in just this year alone. So, again, working with the schools and many of you who support that program, thank you, because that helps you and it helps us as well. Have these things worked? Do students ultimately know about the possibilities in manufacturing? • At certain schools. We’re down in Villard, so we partner with the Minnewaska Schools and we’re trying to get the school on board and get them to understand the importance of exposing the students to the various career opportunities and things like that, similar to what [name] was talking about. It takes somebody at Battle Lake School to embrace 203

the concept and to want to do that as well. And so I think in certain areas there’s a really good program in place for that and others—and we can’t just rely on Alex High School. We need to go to all of those surrounding areas as far out as we want to reach and roll it out. • We hosted junior high students just to plant the seeds. • We have what we call a Summer Six S project and that’s when we hire dependents of our employees, so they’re already exposed to manufacturing. This is a great summer job, a daytime job. You’ve got your nights and weekends to still enjoy the summer. I think the only requirement is you have to be a high school graduate and they earn a good pay to come and we kind of focus on Six S projects, whether it’s cleaning or painting or lawn care or safety. • Tours are a great recruiting tool. We’ve participated in the statewide tour of manufacturing for several years. There’s a couple students in the mechatronics program here right now who came to our tour last year. They said, wow, this is interesting. I never would have imagined this is going on in a little, small town. So it’s expensive, it’s disruptive, but you’ve got to take advantage of all the opportunities. I mean, there isn’t one solution, right? • The (Alex) high school has a mechatronics club. I didn’t know that until my daughter got involved in that, so we supported that. It’s like if the local business can support that like they do a football team or a basketball team, seems local businesses could maybe get more involved in just the mechatronics on the high school. • Yeah, we’ve done that as well and we actually have never sent a support to the football or basketball team other than our general property taxes. In the tour of manufacturers, we were contacted by the robotics team about could they use an area of our facility to put on a demonstration and we said, sure, great idea. And they were a lot of fun. I mean, they came in and they were excited and they were really engaged and it was great to have them as a part of the process. And we, too, have had busloads of I mean kids from Kerkhoven-Murdock-Sunburg and Ottertail Central and Minnewaska and down towards Burroughs and Sauk Centre come—they arrive in a bus and they tour our facility during the weekday when there’s manufacturing going on and then there’re people who meet with them and talk with them about specific things they’re seeing. I mean, they always ask good questions and they come in—because in anything you’re going to have the vacationers, the prisoners and the learners and you just don’t see many prisoners. And you can read the body language. You know what a prisoner looks like or what a vacationer looks like and these kids, they seem to take it pretty seriously. All this energy without even drinking coffee. • Specific to succession planning, though, I think what we’re finding 204

ourselves doing is we’re hiring long so that we’re creating opportunities for people to really learn and experience that job. We’re also doing something that we’ve never been very good at. We’re saying you, you and you, one of you guys is going to be the future, so I’m going to create different opportunities for you to prepare because we identify our needs as red, yellow or green. So when we’re looking at functional areas, are we okay in that area, we’re green, do we have some people in the pipeline, yeah, we do, are we ready, maybe not, so that’s yellow. So how are we going to treat that different? And then you’ve got the red and it’s like, oh boy, we’re in trouble. Do we even have somebody internally to build that position and we’re an organization that we see ourselves as being a $2 million company in a few years and do we have anybody even internally that can lead that? So when we take a look at succession planning, we also have the opportunity with our smaller locations to send people out there to, trial by fire, so to speak, to learn in a smaller organization where you’re touching everything to prepare you to come back into the corporate entity. So, again, we’re taking a look at succession planning very differently today than we did just a few years ago. • Interesting. Somebody touched on it earlier, I believe, and the cost of this employment situation and the challenges that come along with that, the premiums for the shifts, having to bring in people at higher wages, the benefit cost. I think it’s something that we probably ought to keep on the radar. I think that’s going to challenge us to try to meet those needs but to stay competitive, I think is going to be challenging. We’re a worldly—we’re doing business worldly and we have to compete with some of those low-cost countries and as our costs continue to escalate, I think that’s going to challenge us to be competitive. • I think one area where that’s particularly acute and true is in energy. I know our energy costs this year are going to be about $33,000 higher than they were last year. We’re energy intensive and there’re other companies here that are as well. But the alternative mandates and things like scrapping the [big stone], too, expansion, the weird thing about it is that America is disproportionately efficient on a global basis in terms of converting energy into product and with the state and federal level and the new EPA mandates and State of Minnesota’s requirement for alternative energy, it’s artificially driving up costs. And the result is going to be this economic displacement where you have business that ultimately goes to areas of the world and countries of the world that are not efficient converters of energy in a product. And so it’s creating, sort of like the benefits, it’s creating an economic disincentive for heavy industry and manufacturing to be located, for instance, in Minnesota or in the United States and you can go to other places where it’s less stringent 205

and so you’re moving away from relatively clean economies to relatively dirty economies because of the mechanism you put in place in the relatively clean economies. You get down to the diminishing returns on ratcheting up air and water quality type things and the energy generation. I think that’s going to be a huge problem. Let’s do a brief lightning round about other issues. How much do you worry about whether Minnesota’s business climate is pushing out its entrepreneur class? • Don’t keep raising them. That’s my only-• Look, it’s out there. It’s happening. I know people in this area that are positioning to leave. It decreases your capital. It decreases wealth in the state. Last year when Governor Dayton put out the idea of the snowbird tax where if you spent more than 60 days in Minnesota that proportionately you had to claim and it’s crazy because people are going to decide that they’re going to meet the requirement so that they don’t pay the taxes. And it’s like I don’t think the Minnesota economy is hurt by people who have financial means and spend 120 days a year in Minnesota and they hire lawn services and they shop, they go out to dinner and they go to events and things like that and employ people to fix things and they travel and entertain and they’re contributing to the economy. I don’t think you want to put up the idea of getting them to spend 60 days less in Minnesota or 70 days lesser or 80 days less so that they don’t have to pay income tax, I don’t think that’s good for the state because the state’s not going to win. People make up their mind and act in a way that optimizes their result, not everybody but it’s definitely happening and it does create the opportunity that there can be a drain of capital and wealth and that affects the economy, particularly if disproportionately you’re providing services and resources that are not actively contributing to the economy because now you might have people who have wealth to invest and capital to invest disproportionately leaving and people who are looking for goods and services to get by coming in. Over time there’s a tipping point and it hurts. What about the challenges of logistics and shipping? • I have people who can’t work today because I have a crate sitting since Monday in Minneapolis, in customs. I’m new to this but I just can’t believe it. Why is it that they keep saying the paperwork, UPS—we’ve been on the phone every day with UPS. UPS keeps resubmitting the paperwork and one crate, one 1,000-pound crate. Probably because I don’t know enough about it, I gave power of attorney to UPS to do the brokerage. They say, well, it’s your crate but we can’t talk to you because you gave your power of attorney to UPS. It’s a nightmare. And the 206

reason I air freighted it was because I couldn’t get it shipped by sea from Germany because it took three months versus eight months last year. That’s why I air freighted it and I still can’t get it. I’m venting, of course. It’s nice not knowing enough about it because I haven’t done a lot of it yet but I’m starting to do more importation, so. • We have people showing up at our company who are driving trucks and they don’t speak English. They’re from like Eastern European countries or Romania or the Ukraine. We’ve had people who work in our shipping area who ask them questions and stuff and after a while they start wondering—they’re getting answers but I don’t think this person understands what I’m saying and they’re able to establish they really don’t speak English. They pretend to. I’m like, “You’re driving an 18-wheeler.” • One challenge we experience is the availability, the reliability, of rail cars. The availability of railcars is poor. And when you do get it on a railcar, they’re losing them in the switchyards and they’re giving preferential treatment to the oil companies. • For us it’s more around exporting, getting stuff into other countries. You try to get into Brazil, it’s 40 percent tax. So we just bank on 40 percent of whatever your cost of delivery is of MSRP and you aren’t going to put your actual cost on it, so you put the customer cost on it because you’re providing them with the part. You want to know what it would cost them so then you get smoke when you really want to put the lower price on it, right. And so we have those types of issues. India is another place that we struggle with and some of these bigger companies that we—[seed] companies, will try to have us use their location, USbased and try to pass through them to get into these other places, so we’ve been doing some shipments like that to get into their other areas. But for us, it’s that export PCS. It’s starting to add up and then customs are always changing, the documentation that’s required and things of that nature. So it’s one of those pressure points. What about foreign competition? • I’d say it’s less for us. • The aluminum industry has spent millions of dollars in going after the Chinese for dumping and we continue to invest in that and we’ve seen less products coming into the United States since then, although there’s all kinds of circumvention going on now through Vietnam, Malaysia, through Mexico and so the Chinese thing is still a big deal for us. • Is re-shoring creating opportunities? • That’s been our experience. • I’ve seen some really interesting activity relative to the strike on the West Coast. 207

• The West Coast strike was huge. With people having stuff stuck on the ocean for months and that really changed their thinking. • Before, the dock worker strikes were on the East Coast and then they were down in the Gulf area and just that keeps moving around. But the West Coast, that was a big one. It drained out. Maybe related to that, what about managing supply chain relationships? • We’re dependent on a German company for advanced glass. Right about that time, they changed their whole philosophy towards companies like us who view us as competition. So we were not really able to sweeten our pot much because we’re dependent on one huge foreign supplier. But that’s kind of a short version of the story. But in other areas, we’ve found opportunities definitely from a different playing field and competitiveness and vendors that actually appreciate us. One thing that came out of the economic malaise of ’08, ’09 is that all of a sudden on customer surveys, Survey Monkey, they started asking about your strength, your financial strength, your financial health, what your contingency plans are, how you’re looking back on your supply chain and all of a sudden there was a flight to quality because when we went through those tough days no everybody made it. So you had large leading industrial OEMs that got burned by suppliers tanking, leaving craters for a tombstone. And all of a sudden they started caring about that your financial strength, your financial health and how you’re looking at your supply chain. But when there got to be a focus on your financial strength, then that opened the door for a discussion about how do you have financial strength? Well, I mean, you have to generate a profit. You have to have good cash flow, 120-day terms. That’s why we’ve been saying no to those for 10 years because it’s not good for us. I understand why you want to use my money but using my money will undermine our ability to serve you sort of thing and so it actually opened the door for reestablishing some balance and mutuality and the needs for various entities throughout the supply chain. We’re moving again without transition but what about the costs of providing employee-related healthcare. • I mean, because for—one of the challenges that we’re seeing with the Affordable Care Act is that there’re a lot of trip wires you’ve got to navigate in terms of these reports you have to provide or you generate fines and fees. And in some cases it’s almost like a mine field that was put out there to generate fines and fees. It was a revenue center. I mean, if the intent was to tap into a new source of revenue for the government, well done. But if it was to broaden and provide health insurance, then I’d 208

say, wow, talk about an inefficient, ineffective, unsuitable way of doing it. So I mean, we’ve seen more increase of our indirect costs than of our direct costs of the raised health insurance. • I’ll say ditto to most of what he said. I don’t see it making healthcare more affordable. I just don’t, the Affordable Care Act. • As an employer, it forces us to be way more innovative and to consider new game plans. I have my business partner sitting right here. I mean, really you have to have a partnership that’s blowing out the blinders to say, wow, what can we do different next to try to control some of those costs? We think over the years we’ve created pretty savvy healthcare consumers and our employees understand what biometrics are and what their health risks are and they’re making healthier lifestyle choices. But you have those increases, caused us to go after some price increases this year and that was one factor but it was a big factor. • How did that go going for the price increases? • Not well. • Yeah, that’s been our experience, too. • I mean, we pay a disproportionate amount of the fees but that is not— • Because you talk about price increases to customers, right? Okay, yeah. • Oh, sure, those costs are costs. They’re not just incurred. • And that goes back to your comment. I mean, be competitive. I mean, those are challenges. • What we’ve seen is we offer a broad, as do most companies, a broad spectrum of benefits and so then you start—because the health costs are going up and things like that, you start thinking about, okay, what’s our overall package and are there other changes that we need to make? Well, then when we’re in this ultimately competitive environment to hire and retain employees, then you go, well, I can’t cut my benefit package. • Because everybody else has ones that’s relatively on par. We all kind of know what everybody offers for benefits and so you can’t really start— • Another thing that’s big now is these—it’s not health insurance related but the I9 audits. Does anyone here know of companies that—I9. That’s the immigration. Do you have an I9? • Oh, that is a great source of revenue for the government. They come in and it’s really technical violations but there’s a number of companies that I’m familiar with that have been touched by that where the people show up to do the audits and generated $300,000, $400,000, $500,000, $600,000 in fines. And the funny thing was this one company that had 600 people, they had eight people who were not American citizens and their stuff was all fine. Their paperwork all checked out but there’re a lot of technical rules about how you have to store things and what’s 209

supporting information. And if you’ve been lax on that, I recommend that you take a look at the rules, take a look at your files, how they’re sitting because the funny thing with this company that got $600,000 in fines and I think they got it negotiate down to $380,000. The eight people that they had who were not US citizens, their files were fine. And so we got this— not us, it wasn’t our company, but they got whacked with this, I mean, hundreds of thousands of dollars of fines and but yet if you look at how we treat our borders and how—I mean, on one end, we’re letting people just come in, hey, great. But on the other end, you’re going to these employers and they’re fixed. I mean, they’re set. They can’t move. They can’t run. They’ve got more than a satchel and that’s become a great revenue source. So check your I-9s. Make sure that you’re in compliance.

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SELECTED CROSS TABULATIONS

QUESTION)1:))Thinking)about)the)upcoming)year...)In)2015,)do)you)anticipate… !

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

! BASE=TOTAL!SAMPLE ECONOMIC0EXPANSION A0FLAT0ECONOMY A0RECESSION

227 45% 42% 10%

173 38% 43% 16%

169 34% 49% 14%

93 46% 35% 15%

83 51% 38% 9%

221 34% 49% 15%

93 48% 33% 15%

DON'T0KNOW/UNSURE

PRIMARY!BUSINESS PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

66 58% 36% 5%

56 58% 27% 12%

73 37% 45% 15%

80 36% 37% 24%

56 50% 42% 6%

89 50% 40% 7%

295 39% 43% 15%

QUESTION)2:))From)a)financial)perspective,)how)do)you)feel)right)now)about)the)future)for)your)company... !

YEARS!IN! OPERATION

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

66 95% 5%

56 86% 12%

73 88% 12%

80 91% 9%

56 94% 4%

89 90% 10%

295 88% 11%

36% 56% 3% 4%

56% 39% 3% 2%

41% 45% 7% 5%

32% 55% 10% 3%

42% 49% 5% 4%

39% 55% 4% 0%

40% 50% 7% 3%

39% 49% 8% 3%

! BASE=TOTAL!SAMPLE TOTAL0CONFIDENT TOTAL0NOT0CONFIDENT

227 91% 8%

173 87% 13%

169 85% 14%

93 89% 11%

83 95% 5%

221 85% 15%

93 92% 7%

VERY0CONFIDENT SOMEWHAT0CONFIDENT NOT0VERY0CONFIDENT NOT0AT0ALL0CONFIDENT

38% 53% 6% 2%

44% 43% 9% 5%

33% 52% 10% 4%

35% 54% 7% 4%

49% 46% 4% 1%

37% 48% 11% 3%

DON'T0KNOW/UNSURE

QUESTION)3:))As)you)look)to)2015,)do)you)project)your)company’s)gross)revenues)to)increase)or)decrease)compared)to)2014,)or) will)they)probably)stay)the)same? !

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

! BASE=TOTAL!SAMPLE TOTAL0INCREASE TOTAL0DECREASE

227 50% 5%

173 38% 10%

169 35% 8%

93 51% 7%

83 55% 9%

221 37% 7%

93 51% 6%

66 60% 7%

56 63% 4%

73 40% 8%

80 33% 3%

56 49% 11%

89 52% 2%

295 42% 9%

INCREASE0BY0MORE0THAN010% INCREASE0BY0LESS0THAN010% DECREASE0BY0LESS0THAN010% DECREASE0BY0MORE0THAN010%

28% 22% 2% 3%

22% 16% 3% 6%

24% 11% 4% 4%

26% 25% 3% 4%

28% 27% 1% 9%

24% 13% 4% 4%

26% 25% 1% 5%

29% 31% 1% 7%

35% 28% 0% 4%

23% 17% 3% 5%

20% 13% 0% 3%

19% 31% 7% 4%

33% 19% 2% 0%

22% 19% 3% 6%

STAY0THE0SAME

44%

52%

56%

41%

35%

54%

43%

31%

33%

51%

64%

38%

43%

49%

TOO0SOON0TO0SAY/DK REFUSED

1% 0%

0% 0%

2% 0%

0% 0%

0% 1%

0% 0%

1% 0%

0% 0%

0% 1%

2% 0%

0% 0%

211

QUESTION)4:))As)you)look)to)2015,)do)you)project)your)firm’s)profitability)to)increase)or)decrease)compared)to)2014,)or)will)it) probably)stay)the)same? !

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

! BASE=TOTAL!SAMPLE TOTAL0INCREASE TOTAL0DECREASE

227 35% 7%

173 24% 12%

169 25% 10%

93 31% 11%

83 39% 9%

221 27% 10%

93 30% 10%

66 39% 8%

56 44% 13%

73 19% 11%

80 26% 6%

56 33% 6%

89 29% 8%

295 29% 9%

INCREASE0BY0MORE0THAN010% INCREASE0BY0LESS0THAN010% DECREASE0BY0LESS0THAN010% DECREASE0BY0MORE0THAN010%

17% 18% 3% 4%

11% 14% 6% 6%

16% 9% 5% 4%

8% 23% 4% 7%

13% 25% 3% 6%

14% 12% 5% 5%

10% 20% 4% 6%

14% 25% 2% 6%

24% 20% 5% 8%

8% 11% 6% 5%

12% 14% 0% 6%

12% 21% 5% 2%

15% 15% 7% 1%

13% 17% 3% 6%

STAY0THE0SAME

57%

63%

65%

57%

52%

63%

59%

52%

41%

69%

68%

59%

60%

61%

TOO0SOON0TO0SAY/DK REFUSED

0% 0%

0% 1%

1% 0%

0% 1%

0% 0%

0% 1%

1% 0%

0% 0%

0% 1%

2% 0%

0% 1%

QUESTION)5:))As)you)look)to)2015,)do)you)project)your)firm’s)capital)expenditures)to)increase)or)decrease)compared)to)2014,)or) will)they)probably)stay)the)same? !

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

66 24% 19%

56 29% 16%

73 28% 20%

80 19% 19%

56 21% 20%

89 25% 18%

295 27% 17%

17% 22% 9% 11%

21% 3% 4% 16%

15% 14% 6% 10%

17% 11% 6% 14%

9% 10% 6% 13%

10% 11% 8% 12%

7% 17% 8% 10%

15% 12% 6% 11%

62%

42%

54%

55%

52%

61%

59%

57%

55%

0% 0%

1% 1%

0% 0%

1% 0%

0% 1%

0% 0%

1% 0%

! BASE=TOTAL!SAMPLE TOTAL0INCREASE TOTAL0DECREASE

227 28% 14%

173 25% 21%

169 21% 16%

93 34% 21%

83 26% 21%

221 22% 16%

93 38% 20%

INCREASE0BY0MORE0THAN010% INCREASE0BY0LESS0THAN010% DECREASE0BY0LESS0THAN010% DECREASE0BY0MORE0THAN010%

13% 14% 6% 8%

14% 11% 6% 15%

12% 9% 7% 10%

9% 24% 9% 12%

17% 9% 6% 15%

10% 12% 7% 9%

STAY0THE0SAME

57%

53%

63%

46%

52%

TOO0SOON0TO0SAY/DK REFUSED

1% 0%

0% 0%

1% 0%

0% 0%

1% 0%

212

PRIMARY!BUSINESS

QUESTIONS)6Q14:))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. !

! Summary!of!Concerns:!%!8210 BASE=TOTAL!SAMPLE THE0COSTS0OF0HEALTH0CARE0 COVERAGE GOVERNMENT0POLICIES0AND0 REGULATIONS ATTRACTING0AND0RETAINING0 QUALIFIED0WORKERS ECONOMIC0AND0GLOBAL0 UNCERTAINTY COSTS0OF0EMPLOYEE0SALARIES0AND0 BENEFITS,0NOT0INCLUDING0HEALTH0 INSURANCE COMPETITION0FROM0FOREIGN0 SOURCES THE0SHIPPING0AND0LOGISTICS0OF0 GETTING0YOUR0PRODUCTS0TO0 MARKET FUTURE0LEADERSHIP0WITHIN0FIRM MANAGING0SUPPLY0CHAIN0 RELATIONSHIPS

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

YEARS!IN! OPERATION

PRIMARY!BUSINESS PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

227

173

169

221

295

53%

60%

47%

64%

62%

53%

64%

48%

59%

66%

54%

45%

53%

55%

48%

45%

47%

49%

45%

48%

45%

41%

38%

47%

52%

39%

34%

50%

28%

41%

25%

43%

25%

48%

43%

46%

33%

29%

34%

33%

30%

28%

34%

27%

30%

32%

25%

30%

36%

22%

15%

22%

32%

17%

20%

17%

19%

20%

18%

17%

22%

17%

24%

15%

19%

17%

19%

14%

16%

19%

11%

15%

19%

16%

13%

11%

16%

11%

18%

14%

13%

14%

12%

14%

20%

10%

13%

14%

11%

15%

13%

12%

13%

15%

12%

16%

11%

10%

13%

17%

10%

13%

11%

10%

17%

! Summary!of!Concerns:!%!10 BASE=TOTAL!SAMPLE THE0COSTS0OF0HEALTH0CARE0 COVERAGE GOVERNMENT0POLICIES0AND0 REGULATIONS ATTRACTING0AND0RETAINING0 QUALIFIED0WORKERS ECONOMIC0AND0GLOBAL0 UNCERTAINTY COMPETITION0FROM0FOREIGN0 SOURCES COSTS0OF0EMPLOYEE0SALARIES0AND0 BENEFITS,0NOT0INCLUDING0HEALTH0 INSURANCE FUTURE0LEADERSHIP0WITHIN0FIRM THE0SHIPPING0AND0LOGISTICS0OF0 GETTING0YOUR0PRODUCTS0TO0 MARKET MANAGING0SUPPLY0CHAIN0 RELATIONSHIPS

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

YEARS!IN! OPERATION

PRIMARY!BUSINESS PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

227

173

169

221

295

30%

38%

32%

35%

37%

32%

39%

34%

39%

38%

27%

25%

37%

29%

27%

33%

29%

20%

31%

28%

21%

26%

33%

31%

23%

14%

32%

16%

10%

13%

12%

11%

13%

14%

19%

11%

13%

12%

18%

10%

14%

12%

14%

10%

13%

11%

10%

14%

10%

213

! Summary!of!Concerns:!Mean BASE=TOTAL!SAMPLE THE0COSTS0OF0HEALTH0CARE0 COVERAGE GOVERNMENT0POLICIES0AND0 REGULATIONS ATTRACTING0AND0RETAINING0 QUALIFIED0WORKERS ECONOMIC0AND0GLOBAL0 UNCERTAINTY COSTS0OF0EMPLOYEE0SALARIES0AND0 BENEFITS,0NOT0INCLUDING0HEALTH0 INSURANCE MANAGING0SUPPLY0CHAIN0 RELATIONSHIPS FUTURE0LEADERSHIP0WITHIN0FIRM THE0SHIPPING0AND0LOGISTICS0OF0 GETTING0YOUR0PRODUCTS0TO0 MARKET COMPETITION0FROM0FOREIGN0 SOURCES

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

YEARS!IN! OPERATION

PRIMARY!BUSINESS PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

227

173

169

221

295

6.8

7.3

6.3

7.4

7.7

6.6

7.5

7.4

7.3

7.4

7.0

6.4

6.5

7.1

6.6

6.8

6.6

6.9

6.6

6.7

6.9

6.4

6.8

6.9

6.3

5.7

7.0

5.5

6.0

4.9

6.4

6.7

5.1

6.7

6.3

5.6

5.3

6.1

5.6

5.8

5.7

5.9

6.0

5.7

5.9

5.7

6.1

5.6

6.0

6.1

5.4

5.2

5.4

5.9

4.9

5.1

4.5

5.4

5.6

4.6

5.6

5.4

5.2

5.1

4.9

5.1

4.9

5.0

4.1

3.7

3.8

4.0

4.2

3.7

4.2

4.3

4.9

3.9

3.6

3.8

3.7

4.0

3.8

4.2

3.4

4.4

4.6

3.5

4.6

4.5

4.3

4.1

3.6

3.8

4.0

3.8

4.2

3.8

4.0

4.2

3.7

4.2

4.5

4.2

3.2

3.7

4.6

3.8

4.0

3.8

4.0

3.6

4.2

4.1

3.7

4.4

3.9

4.1

4.4

4.0

3.3

3.4

4.1

QUESTION)15:))What)would)you)say)are)the)one)or)two)biggest)challenges)your)firm)is)facing)that)might)negatively)impact)future) growth? !

! ! BASE=TOTAL!SAMPLE RISING0HEALTH0CARE0AND0 INSURANCE0COSTS UNFAVORABLE0BUSINESS0CLIMATE,0 SUCH0AS0TAXES,0REGULATIONS0AND0 POLICY0UNCERTAINTIES ATTRACTING0AND0RETAINING0A0 QUALIFIED0WORKFORCE WEAK0ECONOMY0AND0LOWER0 SALES0FOR0YOUR0PRODUCTS RISING0COSTS0OF0ENERGY0AND0 MATERIALS0FOR0YOUR0PRODUCTS OTHER DON'T0KNOW/NOT0SURE REFUSED

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

YEARS!IN! OPERATION

PRIMARY!BUSINESS PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

227

173

169

221

295

42%

40%

36%

49%

42%

34%

46%

49%

45%

31%

39%

42%

44%

38%

52%

35%

46%

42%

32%

39%

43%

48%

31%

36%

44%

28%

31%

16%

42%

44%

20%

44%

42%

46%

24%

26%

32%

30%

29%

23%

24%

31%

13%

23%

27%

18%

20%

25%

27%

20%

22%

24%

25%

18%

22%

28%

10%

13%

23%

13%

23%

17%

12%

21%

30%

18%

21%

6% 1% 0%

2% 1% 0%

6% 1% 0%

4% 2% 0%

3% 0% 1%

4% 1% 0%

4% 2% 0%

5% 0% 1%

5% 0% 0%

3% 0% 0%

5% 0% 0%

6% 1% 0%

8% 2% 0%

3% 0% 0%

214

QUESTION)16:))Thinking)ahead,)what)would)you)say)are)the)two)or)three)most)important)drivers)of)your)firm's)future)growth?) (Combined)Choice) !

! ! BASE=TOTAL!SAMPLE NEW0CUSTOMERS NEW0PRODUCTS DEVELOPING0COMPANY0MANAGERS0 AND0LEADERS ENHANCING0SUPPLY0CHAIN0 RELATIONSHIPS ACHIEVING0ISO0CERTIFICATION OTHER DON'T0KNOW/NOT0SURE REFUSED

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

227 73% 41%

173 78% 39%

169 75% 39%

93 76% 38%

83 74% 44%

221 74% 39%

93 77% 37%

66 69% 50%

56 73% 41%

73 76% 38%

80 79% 30%

56 65% 48%

89 70% 39%

295 76% 41%

23%

27%

10%

38%

40%

14%

44%

34%

33%

20%

30%

25%

23%

25%

20% 3%

18% 4%

20% 3%

20% 4%

17% 4%

23% 3%

16% 5%

14% 3%

16% 5%

15% 7%

15% 4%

26% 1%

21% 0%

18% 4%

6% 1% 0%

5% 1% 0%

6% 1% 0%

4% 0% 0%

6% 1% 0%

5% 1% 0%

7% 1% 1%

1% 4% 0%

12% 0% 0%

4% 2% 0%

7% 1% 1%

6% 3% 0%

6% 1% 0%

QUESTIONS)17Q21:))Changing)the)focus)somewhat)to)attracting)and)recruiting)new)employees)to)your)firm...I)am)going)to)read)a) series)of)factors)and,)after)I)read)each)one,)please)tell)me)how)important)that)particular)factor)is)to)your)firm)in)attracting) workers,)using)a)one)to)ten)scale)where)one)means)that)factor)is)NOT)IMPORTANT)AT)ALL)and)where)ten)means)that)factor)is) VERY)IMPORTANT.))You)can)choose)any)number)between)one)and)ten)depending)on)how)strongly)you)feel)about)it. !

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

Summary!of!Employee!Recruitment!Factors:!%!8210 BASE=TOTAL!SAMPLE 227 173 AFFORDABLE0HEALTH0CARE 43% 50% SALARY0AND0WAGE0EXPECTATIONS 26% 29% COMPETITIVE0BENEFITS0PACKAGE 25% 26% FLEXIBLE0WORK0SCHEDULES 17% 14% THE0NEED0TO0ACCOMMODATE0PARTI 11% 11% TIME0WORKERS

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

169 39% 23% 22% 16%

93 55% 32% 29% 15%

83 50% 34% 29% 10%

221 44% 25% 23% 17%

93 50% 34% 27% 12%

66 48% 32% 31% 16%

56 47% 18% 20% 10%

73 54% 36% 26% 17%

80 47% 30% 29% 18%

56 40% 33% 28% 20%

89 41% 34% 21% 15%

295 47% 27% 27% 15%

12%

10%

12%

10%

12%

10%

12%

13%

15%

11%

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

Summary!of!Employee!Recruitment!Factors:!%!10 BASE=TOTAL!SAMPLE 227 173 AFFORDABLE0HEALTH0CARE 22% 31% COMPETITIVE0BENEFITS0PACKAGE 6% 13% SALARY0AND0WAGE0EXPECTATIONS 6% 8% FLEXIBLE0WORK0SCHEDULES 6% 4% THE0NEED0TO0ACCOMMODATE0PARTI 5% 4% TIME0WORKERS

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

169 23% 6% 7% 5%

93 30% 11% 7% 5%

83 22% 10% 6% 2%

221 24% 8% 7% 6%

93 28% 11% 5% 5%

66 29% 11% 9% 7%

56 24% 6% 3% 6%

73 29% 6% 11% 5%

80 33% 16% 10% 9%

56 18% 7% 8% 2%

89 21% 7% 9% 3%

295 27% 10% 6% 6%

10%

215

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

Summary!of!Employee!Recruitment!Factors:!Mean BASE=TOTAL!SAMPLE 227 173 AFFORDABLE0HEALTH0CARE 6.2 6.8 SALARY0AND0WAGE0EXPECTATIONS 5.5 5.8 COMPETITIVE0BENEFITS0PACKAGE 5.1 5.6 FLEXIBLE0WORK0SCHEDULES 4.4 4.3 THE0NEED0TO0ACCOMMODATE0PARTI 3.5 3.8 TIME0WORKERS

PRIMARY!BUSINESS PREC2 MET2 PRO2 OEM ISION AL CESS

YEARS!IN! OPERATION 1215! YRS

16+! YRS

169 5.6 5.0 4.4 4.1

93 7.0 6.2 5.9 4.5

83 7.2 6.2 6.3 4.3

221 6.0 5.2 4.6 4.3

93 6.9 6.3 6.1 4.3

66 7.3 6.0 6.4 4.6

56 6.6 5.4 5.3 4.7

73 6.6 5.9 5.4 4.0

80 6.8 5.8 5.5 4.4

56 6.3 6.2 5.8 4.5

89 6.0 5.9 4.8 4.2

295 6.5 5.5 5.4 4.3

3.8

3.7

3.6

3.8

3.6

3.5

3.7

3.9

3.6

3.7

QUESTION)22:))On)average,)over)the)last)two)years,)have)your)firm's)wages,)including)benefits)increased,)decreased)or)stayed) about)the)same?)) !

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

BASE=TOTAL!SAMPLE TOTAL0INCREASED TOTAL0DECREASED

227 57% 5%

173 60% 4%

169 38% 5%

93 71% 3%

83 83% 4%

221 44% 8%

93 79% 1%

66 78% 2%

56 63% 5%

73 60% 5%

80 62% 2%

56 53% 4%

89 53% 7%

295 59% 4%

INCREASED0CONSIDERABLY INCREASED0A0LITTLE DECREASED0A0LITTLE DECREASED0CONSIDERABLY

18% 38% 2% 3%

23% 37% 2% 2%

11% 27% 3% 2%

31% 40% 0% 3%

27% 56% 3% 1%

15% 29% 3% 4%

27% 52% 1% 0%

27% 50% 0% 2%

25% 38% 5% 0%

31% 29% 3% 1%

20% 43% 1% 1%

19% 35% 0% 4%

21% 32% 3% 4%

20% 39% 2% 2%

STAYED0THE0SAME

35%

34%

54%

26%

11%

46%

19%

16%

32%

33%

34%

41%

35%

34%

DON'T0KNOW REFUSED

1% 2%

0% 2%

1% 3%

0% 0%

2% 0%

0% 2%

1% 0%

2% 3%

0% 0%

1% 2%

1% 0%

0% 1%

0% 4%

1% 1%

QUESTION)23:))Do)you)expect)the)average)wages,)including)benefits)to)increase)or)decrease)during)the)next)two)years,)or)will)they) stay)about)the)same? !

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

! BASE=TOTAL!SAMPLE INCREASE DECREASE STAY0ABOUT0THE0SAME

227 60% 2% 36%

173 63% 1% 36%

169 40% 2% 56%

93 76% 0% 23%

83 83% 1% 16%

221 45% 2% 51%

93 80% 1% 18%

66 84% 2% 12%

56 66% 0% 33%

73 61% 2% 36%

80 62% 2% 35%

56 67% 0% 32%

89 59% 1% 38%

295 61% 2% 36%

DON'T0KNOW REFUSED

1% 1%

0% 0%

1% 1%

1% 0%

1% 1%

1% 0%

1% 1%

1% 0%

0% 1%

1% 0%

QUESTION)24:))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)2014,)or)will)it)say)about)the)same? !

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

! BASE=TOTAL!SAMPLE WILL0INVEST0MORE WILL0INVEST0LESS STAY0THE0SAME

227 20% 7% 72%

173 25% 5% 69%

169 14% 8% 77%

93 21% 5% 74%

83 37% 3% 60%

221 13% 8% 78%

93 32% 7% 61%

66 38% 2% 59%

56 39% 3% 58%

73 24% 5% 70%

80 17% 8% 75%

56 27% 3% 69%

89 27% 7% 66%

295 21% 6% 73%

DON'T0KNOW REFUSED

1% 1%

0% 0%

1% 0%

0% 0%

1% 0%

0% 0%

0% 1%

0% 0%

2% 0%

0% 0%

0% 1%

0% 0%

216

QUESTION)25:))Does)your)company)have)a)formal)structured)leadership)development)program)for)supervisors)and)managers? !

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

! BASE=TOTAL!SAMPLE YES NO

227 21% 77%

173 17% 83%

169 7% 92%

93 26% 74%

83 32% 67%

221 11% 88%

93 27% 73%

66 37% 63%

56 19% 81%

73 19% 81%

80 14% 86%

56 22% 75%

89 16% 84%

295 21% 79%

DON'T0KNOW/UNSURE REFUSED

1% 1%

0% 0%

1% 0%

0% 0%

1% 0%

0% 0%

3% 0%

0% 0%

1% 0%

QUESTION)26:))Looking)back)on)the)last)12)months,)did)your)company's)workforce)grow,)shrink)or)stay)about)the)same? !

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

66 58% 8%

56 36% 13%

73 21% 8%

80 21% 17%

56 37% 9%

89 30% 8%

295 27% 12%

5% 32% 13% 2%

25% 34% 7% 2%

9% 28% 11% 2%

4% 17% 6% 1%

6% 15% 11% 6%

10% 27% 8% 1%

5% 25% 6% 2%

7% 19% 8% 3%

75%

49%

33%

51%

71%

61%

54%

62%

61%

0% 0%

! BASE=TOTAL!SAMPLE TOTAL0GREW TOTAL0SHRUNK

227 27% 10%

173 29% 12%

169 13% 11%

93 31% 14%

83 51% 9%

221 14% 11%

93 37% 15%

GREW0A0LOT GREW0A0LITTLE SHRUNK0A0LITTLE SHRUNK0A0LOT

6% 21% 9% 2%

8% 21% 7% 5%

3% 10% 6% 5%

4% 28% 11% 3%

21% 30% 8% 1%

2% 12% 7% 4%

STAYED0ABOUT0THE0SAME

62%

59%

76%

55%

40%

DON'T0KNOW/UNSURE REFUSED

0% 1%

0% 0%

QUESTION)27:))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? !

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

! BASE=TOTAL!SAMPLE TOTAL0GROW TOTAL0SHRINK

227 28% 2%

173 28% 6%

169 16% 4%

93 35% 6%

83 43% 4%

221 17% 4%

93 46% 4%

66 40% 5%

56 38% 7%

73 30% 2%

80 18% 3%

56 30% 8%

89 37% 2%

295 25% 5%

GROW0A0LOT GROW0A0LITTLE SHRINK0A0LITTLE SHRINK0A0LOT

5% 23% 2% 0%

3% 25% 3% 3%

1% 16% 2% 2%

4% 31% 4% 1%

9% 34% 2% 2%

1% 16% 3% 1%

8% 38% 2% 2%

8% 32% 2% 4%

9% 29% 3% 4%

6% 24% 2% 0%

2% 15% 0% 3%

5% 25% 8% 0%

5% 32% 2% 0%

4% 21% 3% 2%

STAY0ABOUT0THE0SAME

69%

66%

79%

59%

53%

79%

50%

53%

55%

68%

79%

61%

70%

DON'T0KNOW/UNSURE REFUSED

0% 1%

0% 0%

0% 1%

0% 0%

0% 1%

0% 0%

217

QUESTION)28:))How)much)of)an)impact)do)you)anticipant)retirements)having)on)your)company)in)the)next)couple)of)years? QUESTION)28:))How)much)of)an)impact)do)you)anticipant)retirements)having)on)your)company)in)the)next)couple)of)years? QUESTION)28:))How)much)of)an)impact)do)you)anticipant)retirements)having)on)your)company)in)the)next)couple)of)years? !

YEARS!IN! YEARS!IN! YEARS!IN! REGION REGION REGION REVENUES REVENUES REVENUES EMPLOYEES EMPLOYEES EMPLOYEES PRIMARY!BUSINESS PRIMARY!BUSINESS PRIMARY!BUSINESSOPERATION OPERATION OPERATION REST!REST! REST! LESS! LESS! LESS! PREC2 MET2 PRO2 1215! 16+! TWIN! TWIN!TWIN! OF! THAN! $1M!2!$1M!2! $1M!2! 10!OR! 10!OR! 10!OR! PREC2PREC2 MET2MET2 PRO2 PRO2 1215! 1215! 16+! 16+! OF! OF! THAN! THAN! $1M $5M $5M+$5M+ $5M+ LESS 1125011250 11250 51+ 51+ 51+ OEM OEM OEM ISION AL CESS CESS YRS YRS CITIES CITIESCITIES STATE $5M $5M LESS LESS ISIONISION AL AL CESS YRS YRS YRS YRS STATESTATE $1M $1M

! !! BASE=TOTAL!SAMPLE BASE=TOTAL!SAMPLE BASE=TOTAL!SAMPLE TOTAL0IMPACT TOTAL0IMPACT TOTAL0IMPACT TOTAL0NO0IMPACT TOTAL0NO0IMPACT TOTAL0NO0IMPACT

227 227 173 173 169 169 93 9393 83 8383 221 221 93 9393 66 6666 56 5656 73 7373 80 8080 56 5656 89 8989 295 295 227 173 169 221 295 28% 28% 31% 31% 22% 22% 34% 34% 41% 41% 26% 26% 33% 33% 40% 40% 31% 31% 34% 34% 27% 27% 31% 31% 21% 21% 32% 32% 28% 31% 22% 34% 41% 26% 33% 40% 31% 34% 27% 31% 21% 32% 71% 71% 68% 68% 78% 78% 65% 65% 58% 58% 74% 74% 67% 67% 58% 58% 69% 69% 66% 66% 73% 73% 68% 68% 79% 79% 67% 67% 71% 68% 78% 65% 58% 74% 67% 58% 69% 66% 73% 68% 79% 67%

SIGNIFICANT0IMPACT SIGNIFICANT0IMPACT SIGNIFICANT0IMPACT MODEST0IMPACT MODEST0IMPACT MODEST0IMPACT ONLY0A0MINOR0IMPACT ONLY0A0MINOR0IMPACT ONLY0A0MINOR0IMPACT NO0IMPACT0AT0ALL NO0IMPACT0AT0ALL NO0IMPACT0AT0ALL

14% 14% 28% 43%

DON'T0KNOW DON'T0KNOW DON'T0KNOW REFUSED REFUSED REFUSED

0% 0% 0% 0% 1% 1% 1% 1% 1% 1% 0% 0% 1% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1% 1% 0%1% 1% 1% 0% 1% 1% 1% 0% 1% 0% 0% 0% 0% 0% 1% 1% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1% 1% 0% 0% 0% 0% 0% 0% 1% 1% 0% 0% 0% 0% 1%0% 0% 0% 0% 0% 0% 0% 0% 1% 0% 0% 0% 1% 0% 0%

14% 14% 14% 14% 17% 14% 28% 32% 28% 43% 37% 43%

14% 14% 14% 17% 8% 17% 32% 19% 32% 37% 59% 37%

14% 15% 14% 8% 18% 8% 19% 36% 19% 59% 29% 59%

15% 17% 15% 18% 25% 18% 36% 40% 36% 29% 17% 29%

17% 14% 17% 25% 12% 25% 40% 19% 40% 17% 54% 17%

14% 17% 14% 12% 16% 12% 19% 43% 19% 54% 24% 54%

17% 14% 17% 16% 26% 16% 43% 40% 43% 24% 18% 24%

14% 18% 14% 26% 14% 26% 40% 31% 40% 18% 38% 18%

18% 13% 18% 14% 21% 14% 31% 28% 31% 38% 38% 38%

13% 15% 13% 21% 12% 21% 28% 28% 28% 38% 45% 38%

15% 17% 15% 12% 14% 12% 28% 27% 28% 45% 41% 45%

17% 9% 17% 14% 12% 14% 27% 22% 27% 41% 58% 41%

QUESTION)29:))How)difficult)is)it)to)attract)qualified)candidates)for)your)firm’s)vacancies? !

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

PRIMARY!BUSINESS

9% 16% 9% 12% 16% 12% 22% 31% 22% 58% 36% 58%

16% 16% 16% 16% 31% 31% 36% 36%

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

! BASE=TOTAL!SAMPLE TOTAL0DIFFICULT TOTAL0NOT0DIFFICULT

227 70% 27%

173 72% 27%

169 63% 33%

93 79% 21%

83 84% 16%

221 64% 33%

93 81% 19%

66 84% 16%

56 73% 27%

73 71% 28%

80 76% 22%

56 74% 21%

89 77% 22%

295 69% 29%

VERY0DIFFICULT SOMEWHAT0DIFFICULT NOT0TOO0DIFFICULT NOT0DIFFICULT0AT0ALL

24% 47% 12% 16%

31% 41% 15% 12%

25% 38% 15% 18%

30% 49% 11% 10%

29% 55% 10% 5%

24% 41% 14% 19%

35% 47% 11% 7%

29% 55% 11% 5%

27% 46% 6% 21%

36% 34% 18% 10%

34% 42% 9% 14%

21% 53% 12% 9%

27% 50% 15% 7%

26% 43% 13% 16%

DON'T0KNOW REFUSED

1% 1%

2% 0%

3% 1%

0% 0%

1% 0%

3% 1%

0% 0%

1% 0%

0% 0%

2% 0%

1% 0%

3% 2%

1% 0%

2% 0%

QUESTION)30:))For)what)reasons)have)job)candidates)not)taken)a)job)or)followed)through)with)an)interview? !

! ! BASE=TOTAL!SAMPLE SKILLS0REQUIRED0MISMATCHED COMPENSATION0IS0NOT0HIGH0 ENOUGH LIMITED/LACK0OF0UPWARD0JOB0 MOBILITY LONG0COMMUTING0 TIME/DISTANCE WORK0SCHEDULES0NOT0FLEXIBLE0 ENOUGH,0DON'T0WORK0OUT OTHER DON'T0KNOW REFUSED

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

227 53%

173 50%

169 44%

93 56%

83 63%

221 47%

93 53%

66 66%

56 59%

73 58%

80 60%

56 39%

89 51%

295 51%

29%

24%

26%

30%

27%

25%

28%

35%

28%

30%

27%

28%

27%

20%

27%

21%

30%

20%

21%

24%

23%

22%

20%

18%

21%

20%

22%

12%

25%

15%

23%

18%

15%

20%

24%

14%

17%

26%

12%

19%

13%

20%

16%

18%

14%

20%

17%

13%

14%

21%

10%

18%

17% 6% 1%

16% 7% 1%

20% 10% 2%

15% 4% 1%

12% 3% 0%

20% 8% 1%

14% 3% 1%

8% 6% 0%

19% 4% 2%

16% 4% 2%

17% 5% 0%

22% 10% 0%

9% 14% 1%

20% 4% 1%

218

QUESTION)31:))What)would)you)say)is)the)biggest)challenge)your)firm)faces)in)attracting)qualified)candidates? )

! ! BASE=TOTAL!DIFFICULT!IN!Q.29 APPLICANTS0DO0NOT0HAVE0THE0 NEEDED0SKILLS0OR0EDUCATION LACK0OF0APPLICANTS0OR0INTEREST FIRM0TOO0SMALL0TO0 COMPETITIVELY0RECRUIT INABILITY0TO0OFFER0COMPETITIVE0 WAGES FIRM0LOCATION0OR0GEOGRAPHY CLIMATE INCONVENIENT0WORK0HOURS DIRTY0FACILITIES SOMETHING0ELSE DON'T0KNOW REFUSED

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

YEARS!IN! OPERATION

PRIMARY!BUSINESS PREC2 MET2 PRO2 OEM ISION AL CESS

! ! BASE=TOTAL!ASKED APPLICANTS0DO0NOT0HAVE0THE0 NEEDED0SKILLS0OR0EDUCATION LACK0OF0APPLICANTS0OR0INTEREST FIRM0TOO0SMALL0TO0 COMPETITIVELY0RECRUIT INABILITY0TO0OFFER0COMPETITIVE0 WAGES FIRM0LOCATION0OR0GEOGRAPHY CLIMATE INCONVENIENT0WORK0HOURS DIRTY0FACILITIES SOMETHING0ELSE DON'T0KNOW REFUSED

124

107

142

204

66% 41%

58% 57%

64% 39%

67% 65%

62% 49%

64% 44%

64% 52%

60% 47%

69% 48%

67% 49%

65% 54%

49% 37%

63% 43%

62% 49%

36%

31%

42%

47%

14%

43%

35%

45%

39%

34%

23%

34%

35%

24% 11% 8% 8% 8% 7%

13% 28% 10% 9% 3% 8%

23% 8% 10% 9% 3% 7%

16% 29% 8% 4% 12% 2%

17% 23% 9% 13% 6% 14%

19% 14% 10% 6% 5% 8%

16% 24% 10% 2% 8% 4%

26% 21% 8% 20% 8% 12%

17% 26% 10% 7% 5% 4%

15% 15% 9% 7% 5% 6%

21% 9% 10% 5% 10% 12%

33% 27% 3% 16% 6% 9%

19% 10% 10% 7% 2% 0%

19% 21% 8% 8% 8% 10%

1% 0%

0% 0%

1% 0%

0% 0%

1% 1%

2% 0%

0% 0%

0% 2%

0% 0%

1% 0%

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

YEARS!IN! OPERATION

PRIMARY!BUSINESS PREC2 MET2 PRO2 OEM ISION AL CESS

! ! BASE=TOTAL!SAMPLE ENTRY0LEVEL0EMPLOYEES EMPLOYEES0WITH0TECHNICAL0 TRAINING EMPLOYEES0WITH0TECHNICAL0 TRAINING0AND0EXPERIENCE EMPLOYEES0WITH0FOUR0YEAR0 COLLEGE0DEGREES OTHER DEPENDS DON'T0KNOW REFUSED

1215! YRS

16+! YRS

227

173

169

221

295

46% 28%

42% 41%

41% 25%

53% 51%

52% 41%

41% 28%

52% 43%

50% 40%

51% 35%

47% 35%

49% 41%

36% 27%

48% 33%

43% 34%

25%

22%

27%

37%

12%

28%

33%

27%

26%

17%

26%

24%

17% 8% 5% 5% 6% 5%

9% 20% 7% 6% 3% 6%

15% 5% 6% 6% 2% 4%

12% 23% 6% 3% 9% 1%

14% 19% 8% 11% 5% 11%

12% 9% 6% 4% 3% 5%

13% 19% 8% 2% 6% 3%

22% 18% 6% 17% 7% 10%

12% 19% 7% 5% 3% 3%

11% 11% 7% 5% 3% 4%

16% 7% 7% 4% 8% 9%

24% 20% 3% 12% 4% 7%

14% 8% 8% 5% 1% 0%

13% 14% 6% 6% 5% 7%

1% 0%

0% 0%

1% 0%

0% 0%

1% 1%

1% 0%

0% 0%

0% 1%

0% 0%

1% 0%

QUESTION)32:))When)looking)to)hire)new)employees,)where)is)your)need)greatest? !

16+! YRS

159

QUESTION)31:))What)would)you)say)is)the)biggest)challenge)your)firm)faces)in)attracting)qualified)candidates? !

1215! YRS

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

227 25%

173 26%

169 26%

93 28%

83 19%

221 25%

93 25%

66 28%

56 28%

73 17%

80 26%

56 29%

89 19%

295 27%

24%

22%

23%

25%

23%

22%

30%

18%

12%

36%

27%

18%

25%

38%

40%

37%

44%

40%

37%

41%

39%

37%

43%

28%

45%

38%

11%

10%

15%

10%

3% 1% 1% 1%

6% 1% 1% 0%

6% 0% 1% 0%

1% 0% 3% 0%

1% 3% 0% 0%

6% 0% 2% 0%

1% 2% 1% 0%

2% 2% 0% 0%

4% 2% 0% 0%

5% 2% 0% 0%

5% 0% 0% 0%

2% 0% 6% 0%

5% 1% 3% 0%

4% 1% 1% 0%

219

QUESTION)33:))What)types)of)manufacturing)jobs)or)positions)are)in)most)demand)at)your)company? !

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

! BASE=TOTAL!SAMPLE MACHINE0OPERATOR ASSEMBLER ENGINEER WELDER SUPERVISOR OTHER

227 32% 22% 13% 4% 4% 21%

173 25% 24% 6% 14% 4% 22%

169 29% 26% 8% 5% 3% 25%

93 31% 16% 10% 15% 5% 19%

83 32% 18% 16% 12% 4% 15%

221 28% 23% 10% 4% 4% 28%

93 34% 22% 10% 17% 4% 10%

66 28% 26% 13% 12% 3% 16%

56 14% 33% 21% 14% 1% 16%

73 54% 20% 6% 2% 2% 13%

80 38% 11% 5% 28% 2% 17%

56 31% 26% 5% 1% 9% 23%

89 15% 23% 13% 4% 3% 36%

295 34% 23% 10% 10% 3% 18%

DON'T0KNOW REFUSED

2% 1%

3% 2%

2% 2%

2% 1%

1% 2%

3% 0%

0% 0%

3% 0%

0% 0%

2% 3%

3% 1%

2% 1%

QUESTION)34:))Will)the)shortage)of)qualified)workers)affect)your)company's)bottom)line)and)ability)to)meet)your)growth)plan)in) the)coming)year?)) !

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

66 40% 13% 28%

56 41% 14% 27%

73 38% 17% 21%

80 39% 17% 23%

56 30% 8% 22%

89 32% 11% 21%

295 36% 14% 22%

51%

54%

56%

62%

61%

69%

68%

62%

0% 0% 0%

2% 3% 1%

2% 2% 0%

0% 0% 0%

0% 0% 1%

0% 0% 0%

0% 1% 0%

! BASE=TOTAL!SAMPLE TOTAL0YES A0LOT A0LITTLE

227 34% 10% 24%

173 39% 16% 22%

169 29% 13% 16%

93 42% 16% 26%

83 47% 14% 34%

221 30% 12% 18%

93 49% 18% 31%

64%

61%

70%

58%

50%

70%

MAYBE/TOO0SOON0TO0TELL DON'T0KNOW REFUSED

0% 1% 1%

0% 1% 0%

0% 0% 0%

0% 3% 0%

0% 1% 0%

QUESTION)35:))Does)your)firm)collaborate)with)local)educational)institutions)for)workforce)training)or)other)programs? !

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

! BASE=TOTAL!SAMPLE YES NO

227 30% 69%

173 43% 57%

169 17% 83%

93 42% 58%

83 65% 33%

221 18% 82%

93 54% 45%

DON'T0KNOW/UNSURE

PRIMARY!BUSINESS PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

66 72% 26%

56 40% 58%

73 39% 60%

80 37% 63%

56 38% 62%

89 26% 74%

295 38% 61%

QUESTION)36:))How)much)of)your)product)did)you)ship)internationally)in)2014? !

! ! BASE=TOTAL!SAMPLE `25%0OR0LESS `26%0OR0MORE

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+ 227 86% 11%

173 92% 5%

169 92% 7%

93 91% 7%

83 81% 16%

221 91% 7%

93 86% 11%

YEARS!IN! OPERATION

66 85% 8%

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

56 72% 25%

89 88% 10%

295 89% 8%

73 88% 10%

80 96% 4%

56 91% 2%

NONE

53%

60%

73%

50%

33%

70%

38%

40%

36%

62%

60%

58%

65%

53%

`10%0OR0LESS BETWEEN011%0TO025% BETWEEN026%0TO050% `51%0OR0MORE

25% 8% 6% 6%

22% 10% 4% 1%

17% 2% 4% 3%

28% 13% 5% 2%

32% 15% 8% 8%

17% 4% 3% 4%

35% 13% 8% 4%

29% 16% 6% 2%

15% 21% 13% 12%

25% 2% 9% 1%

29% 8% 1% 3%

24% 9% 0% 2%

16% 7% 3% 7%

27% 9% 5% 3%

DON'T0KNOW/NOT0SURE REFUSED

1% 2%

3% 0%

2% 0%

2% 1%

1% 0%

2% 1%

4% 4%

2% 2%

2% 0%

0% 0%

5% 2%

1% 1%

2% 1%

220

QUESTION)37:))In)what)part)of)the)world)do)you)see)greatest)increase)in)prospective)business? !

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

! BASE=TOTAL!SAMPLE CANADA EUROPE CHINA ASIA MEXICO SOUTH0AMERICA INDIA

227 16% 11% 9% 10% 7% 2% 3%

173 22% 4% 17% 5% 4% 6% 3%

169 16% 6% 18% 6% 7% 2% 1%

93 23% 11% 9% 5% 3% 3% 3%

83 22% 8% 11% 11% 8% 8% 3%

221 15% 7% 15% 8% 6% 1% 2%

93 26% 10% 10% 6% 5% 7% 3%

66 23% 7% 13% 10% 6% 5% 4%

56 19% 17% 10% 9% 10% 11% 2%

73 17% 9% 16% 8% 3% 2% 0%

80 22% 2% 12% 6% 7% 3% 1%

56 18% 10% 16% 4% 7% 4% 2%

89 14% 11% 12% 12% 5% 2% 2%

295 21% 7% 13% 6% 6% 4% 3%

OTHER NONE0OF0THE0ABOVE DON'T0KNOW/NOT0SURE REFUSED

11% 22% 8% 1%

9% 19% 10% 0%

13% 26% 6% 0%

9% 21% 13% 0%

6% 12% 11% 0%

11% 26% 8% 0%

6% 19% 8% 0%

12% 9% 11% 1%

7% 12% 2% 0%

13% 18% 14% 0%

11% 25% 9% 1%

9% 21% 7% 1%

8% 29% 6% 0%

11% 19% 9% 1%

QUESTION)38:))Have)you)gained)new)OEM)customers)from)them)wanting)to)have)suppliers)closer)to)their)company? !

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

! BASE=TOTAL!SAMPLE YES NO

227 27% 69%

173 25% 73%

169 21% 74%

93 28% 70%

83 31% 67%

221 22% 74%

93 30% 69%

66 34% 64%

56 27% 73%

73 38% 60%

80 30% 67%

56 28% 69%

89 21% 73%

295 28% 70%

DON'T0KNOW/NOT0SURE REFUSED

3% 1%

2% 0%

5% 0%

1% 1%

2% 0%

4% 0%

0% 1%

2% 0%

0% 0%

2% 0%

3% 0%

7% 0%

2% 0%

QUESTION)39:))What)would)you)say)is)the)main)reason)why)your)supply)chain)relationships)changed? !

! ! BASE=YES,!HOME!SOURCING!IN! Q.39 SHORTER0LEAD0TIMES CLOSER0RELATIONSHIPS/REGIONAL0 SUPPLIERS TOTAL0COSTS0VERSUS0ONLY0 PRODUCT0COSTS

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

PRIMARY!BUSINESS

YEARS!IN! OPERATION

PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

61 33%

43 26%

36 38%

26 27%

26 22%

49 37%

28 17%

23 36%

15 40%

28 26%

24 28%

15 27%

18 24%

82 32%

29%

19%

25%

27%

25%

21%

28%

26%

24%

42%

13%

25%

27%

24% 20%

22%

24%

21%

29%

25%

22%

17%

15%

36%

21%

33%

BETTER0INVENTORY0MANAGEMENT

22%

21%

22%

14%

12%

27%

11%

13%

DON'T0KNOW/NOT0SURE

11%

12%

13%

11%

15%

10%

QUESTION)39:))What)would)you)say)is)the)main)reason)why)your)supply)chain)relationships)changed? !

! ! BASE=TOTAL!SAMPLE SHORTER0LEAD0TIMES CLOSER0RELATIONSHIPS/REGIONAL0 SUPPLIERS TOTAL0COSTS0VERSUS0ONLY0 PRODUCT0COSTS

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

PRIMARY!BUSINESS PREC2 MET2 PRO2 OEM ISION AL CESS

227 9%

173 6%

169 8%

93 7%

83 7%

221 8%

93 5%

66 12%

56 11%

73 10%

BETTER0INVENTORY0MANAGEMENT

DON'T0KNOW/NOT0SURE

221

YEARS!IN! OPERATION 1215! YRS

16+! YRS

80 8%

56 7%

89 5%

295 9%

16%

11%

QUESTION)40:))On)a)different)topic,)does)your)firm)have)a)formal)strategic)growth)plan? !

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

YEARS!IN! OPERATION

PRIMARY!BUSINESS PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

! BASE=TOTAL!SAMPLE YES NO

227 41% 57%

173 36% 63%

169 17% 82%

93 45% 55%

83 70% 29%

221 21% 78%

93 53% 46%

66 77% 21%

56 48% 52%

73 29% 71%

80 33% 65%

56 45% 52%

89 34% 64%

295 39% 59%

DON'T0KNOW/NOT0SURE REFUSED

2% 1%

1% 0%

2% 0%

0% 0%

1% 0%

2% 0%

0% 0%

1% 0%

3% 0%

1% 0%

QUESTION)41:))Which)ONE)of)the)following)best)describes)most)of)your)firm’s)customers)and)potential)customers)expectations) about)ISO)certification? !

! ! BASE=TOTAL!SAMPLE MOST0REQUIRE0YOUR0FIRM0TO0 HAVE0ISO0CERTIFICATION MOST0REQUEST0THAT0YOUR0FIRM0 HAVE0ISO0CERTIFICATION,0BUT0 DON'T0REQUIRE0IT MOST0DON'T0CARE0ABOUT0ISO0 CERTIFICATION ISO0CERTIFICATION0IS0NOT0 APPLICABLE0IN0OUR0CASE DON'T0KNOW/NOT0SURE REFUSED

REGION REVENUES EMPLOYEES REST! LESS! TWIN! OF! THAN! $1M!2! 10!OR! CITIES STATE $1M $5M $5M+ LESS 11250 51+

YEARS!IN! OPERATION

PRIMARY!BUSINESS PREC2 MET2 PRO2 OEM ISION AL CESS

1215! YRS

16+! YRS

227

173

169

221

295

10%

14%

10%

19%

15%

12%

18%

14%

15%

18%

16%

11%

26%

28%

20%

34%

31%

21%

39%

29%

27%

22%

32%

31%

19%

29%

50%

57%

68%

43%

36%

66%

35%

37%

44%

54%

45%

50%

64%

50%

2% 1%

3% 0%

2% 0%

4% 0%

1% 0%

3% 0%

1% 0%

0% 0%

5% 0%

2% 0%

1% 0%

2% 0%

1% 0%

2% 0%

222

$15.95

loom in the background of the optimism, even

if the prospects of profitability might temporarily diminish their urgency. Most prominent is the growing skills gap."

Bob Kill President & CEO Enterprise MInnesota

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

2015

Inside, you’ll find:

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

systemic challenges for manufacturers that still

The State of Manufacturing 2015

"It’s important to emphasize some of the

A Comprehensive Survey of Minnesota’s Manufacturers Polling & Analysis by Rob Autry, Meeting Street Research

• Related analyses • Full transcripts from 12 manufacturing focus groups conducted across the state • Selected cross tabulations www.stateofmanufacturing.com