From the August 27, 2004 print edition

In Depth: Manufacturing
Tracy Carbasho

Pressure to remain viable in a fiercely competitive global marketplace is prompting U.S. manufacturers to outsource noncore functions, allowing their employees and executives more time to concentrate on primary business operations.

Darren McKinney, senior director of media relations at the National Association of Manufacturers in Washington, D.C., first noticed more companies hiring outside vendors to handle these functions during the post-recession recovery period in the early 1980s. Business features that are being commonly outsourced include equipment maintenance and repair, food service, marketing and payroll/accounting.

"It's fair to say that manufacturers of all sizes, to one degree or another, are amenable to outsourcing some noncore functions, if they believe it can help make them more focused and competitive,'' said Mr. McKinney. "Anything that draws resources and executive focus away from production of the core product line is increasingly seen as a liability by U.S. manufacturers who are struggling against deflationary price pressures that stem from unprecedented global competition.''

SECTOR GROWING

Mr. McKinney said the manufacturing industry is starting to see a light at the end of the tunnel, following a recession that began in July 2000 and resulted in the loss of nearly 2.9 million American jobs. NAM, the nation's largest industrial trade association, predicts the domestic manufacturing sector will outgrow the overall economy by roughly 50 percent this year.

"Economists' consensus suggests the overall economy will grow nearly 4 percent for the year, while we expect manufacturing to grow about 6 percent,'' he noted.

"Exports are up thanks to a more market-valued dollar and business investments are also up thanks to tax cuts particularly for small manufacturers' investments in capital equipment.''

David Taylor, communications manager at the Pennsylvania Manufacturers' Association in Harrisburg, said the manufacturing industry has the strongest multiplier effect on the economy. He said companies must be healthy enough to compete on a global basis and outsourcing may be the answer to achieving increased productivity and efficiency gains.

"Firms are faced with those kinds of decisions in order to stay open, especially in light of the cost differential of doing business in Pennsylvania compared to other states,'' said Mr. Taylor. "Between December 2001 and December 2002, more than 1,000 Pennsylvania manufacturers left the state or went out of business. The state has a capital stock and franchise tax on corporate assets that businesses have to pay every year even if they don't make any money.''

Mr. Taylor said public policy issues regarding state and local taxes must be addressed in order to keep manufacturers in the Keystone State.

Eaton Corp., a global manufacturer of fluid power systems and services for the automotive, aerospace and other industries, does business in Pittsburgh and throughout the world. The company, which has an office in Moon Township, has seen an increase in machine uptime from 85 percent to 95 percent since outsourcing its equipment maintenance to Advanced Technology Services Inc., a Peoria, Ill.-based provider of factory maintenance and repair services.

"In 2001, we began evaluating the ability of ATS to provide facilities management support, including maintenance of manufacturing equipment and replacement part inventory, against our ability to handle these functions internally,'' said Rich Holder, vice president, supply chain. "ATS demonstrated an ability to improve our reliability and machine uptime at a lower cost.''

Eaton officials declined to release further specifics about their relationship with ATS, citing competitive reasons.

NOT ALL JOBS LEAVE U.S.

Jeff Owens, president of ATS, said "outsourcing'' often has a negative connotation because some people mistakenly believe that it means closing U.S. businesses and sending jobs overseas.

Don Johnson, director of marketing for ATS, said the company may change the name of the service it provides from "outsourcing'' to "optimizing factory output,'' which more clearly defines the work and avoids misconceptions.

"ATS does a function of the business, but the company stays here. This type of outsourcing is a key ingredient to keeping jobs in the United States,'' said Mr. Owens. "Manufacturing in this country is very viable and outsourcing is one way to gain efficiencies.''

Mr. Owens first noticed that some companies were becoming interested in having an outside vendor perform their maintenance and repair work about 10 years ago. However, he said the trend has become more prevalent in the last three years as companies try to improve their operations and reduce their costs.

"Companies once thought of maintenance as a necessary evil, but now they are turning it into a way to increase the productivity of the plant,'' said Mr. Owens. "Demographics also play a factor because the majority of people working in maintenance today are within five or six years of retirement age and there aren't as many apprenticeship and training programs available to prepare people to replace them.''

Mr. Owens said officials at some companies may be hesitant to let an outside firm perform work for them because of potential problems that may occur, especially if the vendor is unable to repair equipment that is vital to operations. There is also concern about what happens to the company's internal employees who traditionally perform the maintenance and repair work.

ATS typically hires the employees who were previously responsible for maintenance at a client's business. Mr. Owens said ATS trains the workers and offers them employment at one of its many locations.

ATS, which works primarily with large manufacturers such as General Electric and General Motors, charges an annual fee to handle the maintenance and repair work for a client. The fee is contingent upon a variety of factors, such as the clients' needs, the type of equipment they have and the scope of work to be performed.