What topics are top of mind for Iowa leaders in advanced manufacturing? The wheels are definitely turning as we gear up to hear insights in dealing with a global scenario increasingly characterized as chock-full of “VUCA” — volatility, uncertainty, complexity and ambiguity.

Ahead of the Business Record’s third annual Manufacturing Forecast, a virtual panel discussion scheduled Aug. 10 at 11:30 a.m., we asked the industry experts we’ve invited to help set the stage for their discussion by answering a pre-event question.

The panelists for the event include:

Heather Bruce, president and CEO, Osmundson Manufacturing Co.
Gabe Glynn, founder and CEO, MakuSafe Corp.
Kevin Kacere, manufacturer adviser, Baton Global.
Jeff Schick, vice president of manufacturing, Pella Corp.
Anne Villamil, professor of economics, Tippie College of Business.

For more information and to register for the free virtual event, visit the event page.

The question:
Based on the current economic conditions and your knowledge of the manufacturing industry, what do you see as the top challenge(s) that manufacturers face in the next one to two years, and why?

Here are responses from four of the panelists. (One of the five was unavailable to respond, but will be participating on the panel next week.)

Gabriel Glynn
Founder and CEO, MakuSafe

I think there are a couple of significant challenges ahead for manufacturers of products, and for companies that rely on manufacturers for the goods/services they sell.

Challenge one: The Ripple Effect. Many of the components that go into electronics are produced in Southeast Asia. These components are essential to many products manufactured globally. The facilities that produce these components, and many finished electronic goods, have faced challenges with government shutdowns and with labor shortages. Like the U.S., many facilities continue to operate at a fraction of 100% capacity and the demand for labor is driving up costs. In some extreme cases, companies are experiencing massive attrition, resulting in a loss of tribal knowledge and job experience. We’ve seen costs rise for certain components up 100 times! Until supply and demand come back into alignment, and for a period of time following that, we will see higher prices on some critical electronic components.

Challenge two: Logistics. We rely on a global supply chain and a global logistics infrastructure to conduct business. High fuel prices, labor shortages and geopolitical forces are wreaking havoc on what was once an afterthought for most companies. Once again, the result is higher costs. We have seen some easing of this as the backlog of shipments has begun to shrink, but this event was a clear warning of the fragility of the global supply chain and logistics.

Some of the kinks have been worked out, but until the fundamental challenges of a shrinking labor force and high fuel costs get figured out, we will likely continue to see pressure on corporate profits for companies that manufacture and ship products.

Kevin Kacere
Adviser, Baton Global

The first challenge that everyone is talking about is worker shortages. These shortages cut across all job levels and functions, from entry assembly/warehouse jobs to the more senior engineering manager and the like. Because of these shortages, there is more churn in the employees as individuals; more than ever [they are] moving from one company to the next. This not only adds increasing costs to acquire staff, but reduces productivity where more folks are needing to be onboarded and trained.  

There are a variety of creative solutions that are available now. One of these solutions that I am very excited about is the taking of the traditional employee engagement survey and ramping it up with insights that are deeper than what traditional surveys provide. We can get more honest feedback through a digital interview that is very psychologically safe, so we can get to what is really going on and what is critically important for them to do their jobs.  

Equally important, we can get productivity insights. What do employees feel is taking their time, but is not particularly valuable? How are people communicating in the organization, and where are breakdowns or unproductive situations? Are all levels of the organization strategically aligned? By surfacing these types of organizational improvement opportunities, we can not only impact employee productivity, but also help with retention as employees feel good about being productive and making an impact. So often we just look at compensation to keep folks, but there is much more that can impact retention.

The other area that I would like to discuss is more broad. Organizations will need to adapt towards leading with strategic agility. The next few years will continue to reflect and amplify the “VUCA” world. VUCA was coined by the U.S. Army and is now a business concept standing for:  volatility, uncertainty, complexity and ambiguity. Think in terms of how supply chains have been impacted, export markets like Russia and Ukraine have impacted companies’ sales and investments, and cost impacts such as tariffs have really impacted margins. All of these areas and more are going to be highly volatile and change over the next five years.

We see companies doing more on-shoring and diversification of supply chains, which are important, but the situation is much bigger and more uncertain. Organizations will need to be able to intake and analyze geopolitical data more readily and effectively. Not just at annual strategic planning time, but continually with information sharing across the organization.  Communication across teams and regions is more important than ever. And a corporate culture that supports quick decision-making and flexibility is critical.

Jeff Schick
Vice president of manufacturing, Pella Corp.

Underscored by the nature of the volatile, uncertain, complex, and ambiguous (VUCA) economic and geopolitical environment, manufacturers will face the following three challenges requiring creative and sustainable solutions to improve customer service, remain competitive and develop scalable process capabilities:

1. Continuing labor shortage and inflation – exponential with skilled trades.
2. Accelerating energy interruptions and inflation – uncertain energy supply.
3. Chasing demand volatility – exacting customer service expectations.

The labor shortage in manufacturing will continue to be a headwind to growth and drive inflation as significant job openings continue to go unfilled. At Pella, we’re working to quickly identify and implement the highest priority items for job seekers today; Of course, higher wages is part of the equation, but we’ve also found that predictable hours and flexible schedules are as important today than ever before. We’re not just competing with other manufacturers for talent anymore – we’re competing with the gig economy and emerging industries like rideshare and work-from-home customer service-focused roles.

Turnover also creates challenges, causing lost productivity from training and retraining. At Pella, we currently have an average retention rate of 14 years, well above the industry average, but if we want to stay competitive in this labor market we’re going to have to continue to offer development opportunities and an exceptional culture.

The demographics of those going into general manufacturing is not keeping pace with the need, and specifically the population of welders, electricians, pipe fitters and other skilled trades has not grown at the rate required to support the capacity needed. A resurgence of trade school enrollment and company-sponsored apprenticeship programs will help over the long term, along with the deployment of advanced digital automation technology helping to draw in new and early career people now.

We have a long-standing partnership with the Career Academy of Pella as well as many high schools and community colleges across the country where we have our 18 manufacturing facilities. In 2019, we kicked off our partnership with Keep Craft Alive, a movement that encourages young people to enter the skilled trades, like those mentioned so far.

Uncertainty in the energy supply is starting to get broader attention. Certain areas with more unpredictable sources like wind and solar are lacking the base load steady energy sources to meet the increasing demand levels. As our manufacturing utilization and overall capacity increases, the demand for continuous energy at peak levels will necessitate demand shaving strategies (i.e., interruptions), advanced clean energy storage technology and increased base load energy sources to handle the overload conditions.

Energy inflation will continue until this demand and supply imbalance can be corrected with capacity and the prices of the base load energy sources like natural gas are neutralized with increased supply as well. We’re continually evaluating how we can diversify our energy resources while honoring our commitment to sustainability. We’ve won several awards over the years for energy efficiency in our manufacturing processes from the Environmental Protection Agency’s Energy Star program.

The modern customer expects a modern experience. Whether you’re nearly 100 years old, like Pella, or if you’re a new company entering the space, customer service expectations continue to be more exacting than ever before. Product availability, lead times, quality and more value-add support are table stakes to success.

Customers demand trouble-free experiences and will migrate to those who are “easy to do business with” to meet their needs from start to finish. Pella has quickly adapted to this landscape with a newly available online ordering capability on our e-commerce platform, making us the first national window brand to offer online product configuration and ordering for the homeowner. This “instant” or ‘“on-demand” nature of customer expectations, coupled with rapidly changing economic conditions, creates demand volatility that becomes increasingly difficult to meet in capital-intensive industries like windows and doors.

The winners will clearly be those who meet the challenges head-on with the courage to adopt creative solutions with a relentless focus on serving the customer, eliminating waste and becoming the employer of choice.

Anne Villamil
Professor of economics, University of Iowa Tippie College of Business

I see three main economic challenges to the manufacturing industry: macroeconomic conditions, namely inflation and a possible recession; a tight labor market, especially for manufacturing and in Iowa; and geopolitical conditions such as a strong dollar and uncertain policies in Russia and China that would have global and local implications.

Inflation is currently high in the U.S. and in many other countries due to shocks such as COVID (economic policy responses and supply chain problems) and energy and commodity prices. In response, central banks are raising interest rates to lower demand, which tends to lower prices. The goal of Federal Reserve policy is a “soft landing” — to reduce demand without inducing a recession — but the Fed has stated clearly that its policy could lead to a recession. Recessions make the operating environment for firms more difficult, with lower profits, decreased output and less employment. Already, increasing interest rates and greater uncertainty are decreasing investment and causing some firms to express caution about future hiring. Consumer confidence is low, which is worrisome because consumption accounts for about 70% of GDP, but spending remains solid.

Right now, the labor market remains tight nationally, and is especially tight in Iowa. The national unemployment rate is 3.6% and the rate in Iowa is 2.6% (June 2022). These are historically low numbers. Another important measure is the labor force participation rate (LFPR), which is the percentage of the civilian noninstitutionalized population age 16 and older who are employed or actively looking for work. Think of the LFPR as those who want to work (i.e., have a job or want one) relative to those who could work (everyone over age 16 that isn’t incarcerated or on active military duty). Iowa’s latest LFPR is 67.8%, while the national LFPR is 62.2% (June 2022). Iowa’s LFPR has been consistently higher than the national average, but both Iowa and the national economy are facing general declines in LFPR as baby boomers retire. Sharp declines in LFPR occurred during COVID, especially in Iowa.

Finally, the U.S. dollar is strengthening as the Fed increases interest rates and as global uncertainty increases (“flight to quality”). A stronger dollar hurts exporters, but helps importers. Iowa is the second-largest agricultural exporting state in the U.S. (soybeans, pork, corn, feeds and grains), shipping $10.3 billion in domestic agricultural exports abroad in 2017. Iowa’s exports of manufactured products are even larger, at $12.0 billion in 2019 (food, beverage and tobacco; chemicals; computers and electronics; fabricated metals; minerals; plastics and rubber; metals; electrical equipment and appliances; and wood products). Global uncertainty is increasing due to slowing world economies, increases in energy and other commodity prices, and geopolitical uncertainty in Russia (the war and energy and commodity trade) and China with continuing shutdowns due to COVID and uncertainty about Taiwan.

All three challenges pose threats and opportunities for Iowa manufacturers as the world continues to adjust to changes induced by COVID, new shocks due to the Russia-Ukraine war, and China’s COVID, trade and Taiwan policies. This economic environment is unprecedented!