Expectations for 2004 are higher in both the manufacturing and non-manufacturing sectors, according to the latest Semiannual Economic Forecast, which was released during the Institute for Supply Management's Economic Summit. Presenters Norbert J. Ore and Ralph G. Kauffman talked to us about what some of the numbers mean:

Industrial Market Trends:
Let's start with the manufacturing forecast. The industries expecting the greatest increases in business revenues included electronic components and equipment. Conversely, were there any industries that were struggling or did not share that optimism?

Norbert J. Ore, C.P.M., Chair, Manufacturing Business Survey Committee, ISM:
Yes. There's obviously a lot of data that never gets published. There are three industries—chemicals, only a 1.3% increase in revenue in 2004, and actually industrial and commercial equipment and computers, they expect a decline of 1.4% as opposed to the average (expected) improvement, which was 5.8%. And the paper industry has an overall expectation of decline in revenues by 1.6%.

IMT:
But most industries expected an increase in overall revenues this year?

Ore:
Right. The real winners included electronic components and equipment, which was expecting an 11.7% increase. That may be the better story, frankly, those above the average. And transportation and equipment expected a 10% increase. Fabricated metals, an 8.6% increase. So there are some pretty aggressive expectations there.

IMT:
We're looking at this by industry. Would size be a factor as well? Many of our readers are smaller manufacturers.

Ore:
Smaller manufacturers are in many cases suppliers to larger manufacturers. So their expectations are about the same. The thing I always try to talk to my people about is picking your customers and understanding more about them. A guy from a little company out in Iowa called me a number of months ago, and he said his business had been doing really well, even after 9/11 had done well. And he said all of a sudden his business fell off like 30%. He said is there anything you can tell me to help me account for that. And I said not really. I can't give you a good reason within the data that that's the case. I said you really need to understand who your customers are and you need to understand their business because something has changed for them. And that's where I would go. Many of those small businesses don't pay a lot of attention to who their customers are.

IMT:
Interesting. And in fact, the Report on Manufacturing could help them in some ways to look at…

Ore:
Certainly to identify some industry trends. They really should pay a lot of attention to the monthly report, particularly to those industries that are growing. Right now, we have 8 industries listed in terms of this past month (November) as showing improvement in employment.

IMT:
Speaking of manufacturing employment, you said that you didn't expect it to recover because of the deep cuts that manufacturers had made. So what is the significance of the projected 0.3% increase in manufacturing employment for 2004? Is this surprising?

Ore:
One, I think it's a little surprising. Secondly, I think it's a little conservative. And you know we expect employment to recover, it's not that it won't. It's just going to take longer. And certainly our forecast says it's not going to be a big jump or anything associated with that in 2004. One of the things we find is by the time we do the semiannual report in May, things tend to improve a little bit in people's minds and so on. And with the track that we're on, I would expect them to come back and realize that. We'll see better prospects for employment than what we're stating at this point. I think Ralph probably agrees with that. So it's not exactly a jobless recovery, but it's certainly not one that's going to generate jobs quickly.

IMT:
It's interesting where we'll see the jobs. As you said, Ralph, there are productivity issues in both manufacturing and non-manufacturing.

Ralph G. Kauffman, Ph.D., C.P.M., Chair, Non-Manufacturing Business Survey Committee, ISM:
Yes, there's been a lot of technology employed during the downturn and prior to it, which reduced the need to add employees or to add them as quickly as otherwise might be the case.

Ore:
So the economic downturn forces the tough decisions.

Kauffman:
Right. That has brought some of these things to light, and I think that has aggravated the employment situation.

Ore:
It's a tragedy for the people (who lose their jobs). It always has been and always will be. You hate to see that, but our economic system is built on the strong surviving. And we move work that shouldn't be done here because of cost and so on. Manufacturing has been going through this for 15 or 20 years. This isn't new to manufacturing, but we're reallocating our resources. What is new is in the services sector. The average American plant which manufactures here still is less than 10% labor. Now we've got the services sector where the cost is 50, 60, 70% labor and now the big challenge is going to be to take the cost out of services.

Kauffman:
And the technology is enabling that to be done to some degree. It doesn't always work. Dell computer put some call centers in India for support, and they've brought some of that back because, I guess, the people there weren't able to speak English well enough to answer customers' questions. But the capability for completing that kind of work anywhere in the world exists now, with the Internet and other communications capabilities that we have.

IMT:
So it's definitely a trend that you see continuing.

Kauffman:
I think so. At least the concept of companies evaluating what they do and determining where's the best place to do it. And that's going to change. It's not like everything's going to go to China and no one else is going to make anything. In China, their cost of doing business will come up. In fact, even in India, the cost of operating call centers has come up somewhat. For one reason, there's only a limited supply of people who speak English well enough to work there. And the salaries that those people are receiving I understand have gone up because there's competition for them over there. So these things continue to evolve and companies will continue to evaluate where's the best place to do things considering everything. But as Norbert said, things that have high labor cost, those will always tend to go where labor costs are low.

Ore:
I think what we're seeing is a greater likelihood that people are willing to look globally or to allocate resources globally.

Kauffman:
There's more of a capability to do that now so therefore people are more likely to consider it.

IMT:
And the numbers showing that exports will grow…those numbers that you indicated of export increasing on some level is good news…

Ore:
Absolutely.

IMT:
…because there are certain commodities or categories that Chinese manufacturers are going to require that will come from the U.S.

Kauffman:
That's right.

Ore:
Many of those small companies you're talking about, our survey shows, those companies are exporters. They do those things. They really need to do them more. We've been able to sit back, fat, dumb and happy in many ways and not look to export markets. You take a country like Denmark. 80% of everything they've made traditionally has been for export. They've always looked to the export market.

Kauffman:
There are a lot of European countries…

Ore:
Like Germany. We hear so much about the machine building industry in Germany and so on and the majority of that has always been for export. I think the smaller businesses have been fairly good at coming up with export markets. I think they just need to become a whole lot better at taking higher end, more value-added products and exporting those.

Kauffman:
And technology again has helped them to be able to do that.

Ore:
Absolutely.

Kauffman:
It's helped the smaller companies to do that. Communication is a lot less expensive than it used to be. You don't necessarily have to make many trips to somewhere because you can use the Internet to collect information.

Ore:
And the logistics…

Kauffman:
That's improved also.

Ore:
When the West Coast dock strike took place, I thought it would shut down the automotive industry because of the amount of components, but you know what though—they were all bringing them in by air!

Kauffman:
And not just automotive either.

Ore:
A lot of others are shipping in that fashion. Now, the strike impacted the retailers because they're the ones that are filling up the containers full of consumer goods coming in. It's the textiles, the apparel and so on, that comes in. They were the ones that were really affected much more so than manufacturing here was affected by that even though we do import a lot. I know we have numbers that are in the electronics industry showing they don't buy anything or ship anything in truckload quantities. Everything comes in by UPS and everything goes out by UPS.

You always think that there's a factory and there's a big back door. And here are the trucks being loaded with a forklift. And there are a lot of companies that don't ship like that.

Kauffman:
They don't deal in such deep volumes.

IMT:
I'm reading in the supply chain practices category the fact that there was such concurrence between manufacturing and non-manufacturing on some of the top categories. Technology improvements—although they were second in non-manufacturing and fourth in manufacturing—were still in that top 5. Were any of your responses more granular in terms of which areas of technology were of interest?

Ore:
Here are some comments. "More e-commerce." "Upgrade our ERP system"—that certainly has the implication that they're making it more productive. Most purchasing departments were disadvantaged by the introduction of the ERP system over the short-term because they had to take on more work as opposed to less in order to service the ERP system. Then you start to work your way out. You get an upgrade and you start to do it better.

IMT:
What I found interesting, too, was that in the non-manufacturing sector, purchasers listed the use of electronic commerce and e-procurement as their number one means of improving supply chains in 2004, but that wasn't the case in the manufacturing side.

Ore:
I think one of the reasons for that is that manufacturing has been more automated longer. They have basic manufacturing systems and so on, whereas in non-manufacturing, they don't have that simple system that unites everybody to participate in that system where you get all your purchasing online. So they've put in products like Ariba and e-procurement-type solutions much more so than the manufacturing sector. It's like they're saying, "I don't want to fool with Ariba because I've got too many systems I'd have to tie it into. I would be better off if I had nothing at all then I can use Ariba." And that's the way they are. They're able to do that so there's more movement in that direction.

IMT:
If you could give us just one soundbite in terms of the significance of the forecast not only from a perspective of someone following the reports but participating in the surveys, what would it be?

Ore:
I think probably the greatest significance that comes out of this is that buyers need to evaluate the marketplace differently. That when they're sourcing they need to consider a greater sense of strategy. That these numbers would indicate to some degree that we're moving from a buyers' market into more of a sellers' market. And certainly it was a strong buyers' market. This doesn't predict a strong sellers' market, but it predicts more equilibrium between buyers and sellers. And your approach may need to be different than it has been over the course of the last 10 years.

Norbert Ore is also group director of strategic sourcing and procurement at Georgia-Pacific Corporation.

Ralph Kauffman is also coordinator of the purchasing and supply management program at the University of Houston-Downtown.