During my years in purchasing it seemed like I was always involved in some type of economic development activity, whether it was in getting state or federal grants for focused supplier training, putting together a multi-OEM Supplier Development Consortium or advocating for the Manufacturing Extension Partnership (MEP). Probably because of this, I was once on the short list to head up one state’s Department of Commerce. At the final interview, I thought things were going pretty well — until I asserted that any future manufacturing economic development initiative should include a focus on supply chains, and then backed this up with a couple of examples from that state explaining my rationale. I got the sense that things had taken a turn for the worse when the eyes of the interviewers started to glaze over.
I didn’t get the job.
Here are the two examples that I provided at that interview. Read through them and make up your own minds as to whether they provided a good supporting case for my interview assertion.
In-State Manufacturer, Out-of-State Supply Chain
A state-based OEM of seasonal yard maintenance equipment decided to expand capacity by opening a second manufacturing facility. The site for their new facility was in a different state. Over the years, the incumbent facility had focused on its own core competencies and outsourced a significant portion of its primary manufacturing processes. The OEM was meticulous in selecting suppliers to outsource to, and, because of this, had developed a world-class regional supply base around that original plant — with a significant portion of that supply chain located within the same state it was situated in.
Over time, the purchased content portion of the new facility’s Cost-Of-Goods-Sold (COGS) stabilized at approximately 80% — meaning just 20% of its COGS was spent “local” to the new plant as part of the factory’s cost of conducting operations. Although the OEM did have competitively priced sources local to the new plant, it found it difficult to match the value-add support provided by the suppliers to its incumbent sister factory. Consequently, fourteen years after opening, 40% of the parts purchased by the new plant were still being purchased from those original suppliers.
So, although the new state had given the OEM all sorts of incentives to open a new plant, very little of that factory’s spend was in the new state. Consequently, the 32% of the OEM’s COGS spent in the incumbent state overshadowed the 20% of the COGS the new state had gained from operations. The difference meant that millions and millions of more dollars a year were spent by that OEM in the incumbent state rather than in the state where the new plant was sited.
A Steady Funnel of Money
A major component manufacturer similarly elected to increase capacity by opening a secondary plant in another state. They ran their business for generations in the incumbent state and in doing so had developed a strong “local” supply network. Five years after their new plant opened, purchased content accounted for 75% of the COGS — 38% of which was still being purchased from the supply base located in the company’s incumbent state. This again meant that while the state where the new plant was sited offered significant financial benefits in order to get the manufacturer to locate there, every year it was funnelling more dollars into the incumbent state, rather than keeping that money in its own state.
Existing Manufacturers + Local Supply Chain = Job Creation
You tell me, should my pitch have fallen on deaf ears or does it make sense? The interviewers seemed pretty sharp so I suspect they understood I had made a good case for my position, but probably felt it wouldn’t produce the quick hit-type impact that they were looking for.
In both of the examples, the tax incentive honey pot lured new manufacturers and resulted in more jobs. However, rather than creating an environment where money could be generated and recycled within their own economies (creating even more jobs and even more money), both states essentially paid big incentives in order to drain significant money out of their economies every year going forward. That tells me that tax incentives only focused on attracting new manufacturers into a state only solves short term problems, unless they are joined by incentives supporting and improving the existing manufacturers and the existing supply chain. This allows for the creation of new jobs on several different fronts, as well as fostering more sustainable growth afterwards.
“Just as many financial resources should be made available to increase employment in existing, state-sited manufacturers as is being spent bringing new manufacturers to the state.” –
My bottom line proposal was simple. Going forward, just as many financial resources should be made available to increase employment in existing state-sited manufacturers (primarily small and medium-size firms) as is being spent bringing new manufacturers to the state. In other words, I believed a two-pronged approach to job creation would produce better job creation results than just smokestack chasing (which you can read about more, here).
Here's Another Question for Manufacturers
As a small or medium-sized manufacturer do you believe you could create enough new capacity and/or generate the business necessary to support an additional employee if you were granted $100,000 in state incentives? And, if you were lucky enough to be granted a million dollars in such incentives, could you figure out a way to increase employment to support ten new employees?
Without hearing your answer, I’m pretty sure I know what your response would be.
“Why aren’t existing businesses offered the same state incentives to increase employment as the new guys — especially since those state-sponsored incentives are also partially paid for by manufacturers already operating in the state?” –
So if that’s the case, then why aren’t existing businesses offered the same state incentives to increase employment as the new guys? Especially when those state-sponsored incentives are also partially paid for by manufacturers already operating in the state. Call me a cynic, but I think it’s related to politician desire for Dog and Pony shows, as described in my last column. Go figure. You might want to ask your state representative the next time he has a local constituent meeting in your area.
My next column will lay out what I consider one of the most difficult jobs in the world: Being a Buyer for a large OEM.
Learn more about Paul Ericksen and his over 40-years of experience in the manufacturing industry here.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of MakeTime or any MakeTime employees.