Innovation and Transparency are Top Ways Manufacturers Guard Against Rising Costs

The “hidden cost” of complex regulation is a top frustration among local manufacturing CEOs.

As the economy recovers, manufacturers of all stripes worry about the rising cost of raw materials. The East Bay’s most successful manufacturing firms are no exception. But through a creative combination of innovation and transparency, these employers are finding ways to cope and prosper.

Four CEOs of East Bay manufacturing companies shared their tips for mitigating increasing and unpredictable costs to some 30 business leaders at the inaugural meeting of the East Bay Manufacturing Group.

The East Bay has traditionally been a manufacturing economy. Legacy industries closed over time, but many were replaced by so-called advanced manufacturing jobs, and the region has transformed itself. “Manufacturing still matters,” said Karen Engel, executive director of the East Bay Development Alliance, who attended the forum. “We need to focus on how we protect that asset.”

Christopher Andersen, Founder and CEO of Atlas Capital Strategies, led the panel, which focused on the best ways for companies to improve production and business processes, trim costs, and negotiate with suppliers and customers.

While the current national inflation rate is just under 3 percent, many companies are facing soaring costs in electric power, fuel to transport products, and raw materials such as butter or steel, with some tripling in cost in the past year. Add the growing costs of wages and health care and the so-called “hidden costs” of regulation, and even companies with healthy profit margins must vigilantly work to improve production and business processes to keep pace.

Innovation
Hannah Kain, President and CEO of Alom Technologies, a global supply chain management company based in Fremont, has a relentless focus on improvements in productivity and processes. She reported Alom has quadrupled revenue per employee over the past decade. “We constantly do process improvement to work more efficiently,” she said.

Some industries, such as food and beverages, have seen raw material and transit costs skyrocket.

Likewise, Karen Trilevsky, the CEO and Founder of FullBloom Baking Company, has found success in publishing the metrics for each shift’s performance and sees that her employees enjoy competing for productivity gains. The first thing her employees do when they enter the work environment is check the stats from their previous shift to see how they compare to other shifts. “The numbers just keep getting better and better and better. We’ve achieved rates of efficiencies that are really unheard of, and it’s all driven by competition and bakers really taking pride in what they are doing.”

FullBloom, based in Newark, supplies baked goods to cafes, restaurants and Whole Foods, manufactures for private label brands, and will soon debut its own brand.

John Lettko, CFO and General Manager of All Weather Insulated Panels, which has a manufacturing plant in Vacaville, noted that product flaws, if caught immediately, save enormous costs. “Every order is a custom order. If we produce the wrong panel and it gets out the door, it costs us four times what it would cost if we catch it in-house. If we see a problem, we stop the line immediately,” he said.

The company also empowers its employees, from entry-level on up, to continually experiment with their product and materials. That’s why the freezer in the breakroom has bolts sticking out as workers test the conductivity of various materials. In another instance, Lettko said a forklift driver came up with a solution to protect panels that were being damaged during handling, and he did it quickly, using scrap materials already on site.

“The second piece for us is safety,” Lettko said. “We created a super insane focus on safety, and it had the unintended consequence that our individuals felt like we cared about them. So we get innovation from the lowest level to the highest” because employees now realize the extent to which their contributions are appreciated and valued, Lettko said.

Peter Offermann, President and CEO of Cellotape, a Fremont-based screen printer and label manufacturer to the wine and high-tech industries, said he has offset materials cost increases by making cuts in other areas. “We supply to the tech industry, and they think Moore’s law applies to everything. They want us to reduce our cost each year by 8 percent,” he said. Most of their jobs are low-cost, averaging $1,000, and so managing the flow of work becomes critical to keeping the line moving at profitable levels.

Transparency
The CEOs agreed that transparent communication with suppliers and customers is key to receiving and delivering value. This helps companies negotiate multi-year pricing agreements with suppliers, and, in some cases, allows them to offer multi-year contracts to customers at a fixed price.

FullBloom’s customers are kept fully informed about the rising costs of butter, flour and sugar. “We know they want low prices, so it has become a joint effort. Because they are willing to make commitments farther out, I can buy flour 24 months out, which is unheard of,” Trilevsky said. The company also helps customers understand how cutting costs affects the product. “We show them the difference between a 40-cent muffin and a 50-cent muffin,” she said. Buyers may want the cheaper muffin, but the business owners know quality sells more product, she explained.

What’s more, FullBloom has developed such trust with its customers that Trilevsky can tie her costs directly to the raw materials costs. Customers pay more when the commodities are higher, but less when the price falls.

Lettko agreed. “We don’t have a lot of ability to influence costs on a job-basis. I look at it on a relationship basis. Sometimes it’s better to take business at a lower margin to keep the business humming.” Doing so means Lettko has largely escaped having to work to get his invoices paid.

All Weather Insulated Panels has three employees who track steel prices and manage the purchase of raw materials. “We don’t buy from many suppliers, so we get meaningful discounts, and play them off each other aggressively. We are always prepared to change suppliers,” and the suppliers know it, Lettko said. Despite the economy, the firm has recently grown from 33 employees to 66 as it expands across the country.

Offermann said Cellotape has done “all we can” to reduce nonmaterial costs, with a focus on lean manufacturing and careful hiring. And he talks to customers about the choices of components in the final product. “We have interjected ourselves into that dialogue. We tell them, ‘let us work your suppliers to create a cost-effective solution to your problem.’” He also “works his suppliers really hard.” Cellotape has 300 suppliers, 10 major and the rest minor. “We have demonstrated to several we will move our business, and we have much more attention from suppliers than we used to. They know if they hand us a price increase, their contract will be under review.” Offermann was even able to convince one supplier not to increase prices for two years, at a time when price increases averaged 20% across the industry.

Savvy CEOs like Kain know that only the strongest tech brands can pass increased costs onto consumers. So she gives customers online visibility to every aspect of Alom’s process. If a customer has to call, she feels she has failed, she said, in creating full visibility.

“Hidden Costs” of Regulation
While these professionals agreed that “near-sourcing” is the next big trend for U.S. manufacturing (Lettko’s firm is building a plant in Arkansas and is now buying American steel rather than foreign steel to reduce delays in getting the product), they said federal, state and local regulations are out of control. They discourage business development and expansion and hit small and mid-sized businesses especially hard. “We cannot amortize those compliance costs over as many employees as GM,” said Kain.

The trend toward “near-sourcing” could mean more manufacturing jobs in the U.S., and increased potential for real-time product innovation.

Businesses now have “process compliance” regulations to follow, in addition to product compliance regulations. Kain pointed to a new regulation that forces companies to certify that none of the metals used in manufacturing come from mines in the Congo, where human rights abuses are rampant, and which the SEC has labeled “conflict materials.” This includes not just product raw materials, “but the knife that cuts the oats,” Kain explained.

Additionally, companies with $100 million in revenue or greater must certify there is no indentured or child labor in their supply chain. Alom’s revenues don’t trigger the law, but when Alom’s company enters the supply chain of a company with more than $100 million in revenues, Alom is subject to the law as well. “You will go out of your mind before you are done” with the compliance process, she said.

Lettko said he has been surprised how lenient Arkansas’s regulations are compared to California. When they opened their new plant near Little Rock, AR, Lettko met with the local fire chief and one or two other officials. “We were done in an hour. And this is a monthly event in California.”

Regulators do not coordinate their activities, and severely limit expansion, he said. “If I want to expand, I’ve got 50 little agencies who show up at the front door and want to trot all over the place like they own it. They don’t know what each other are doing, they fight with each other on the plant floor, and can shut things down just because they feel like it,” Lettko said.

And political leaders seem deaf to their protests. “There never seems to be an ‘enough is enough’ response,” he said.

Agencies such as PG&E are notoriously difficult to deal with, the business leaders agreed. Lettko said PG&E approached their company last year and said its daytime power rates would go up 400 percent. “They told us to process at night. So now we process at night. I felt like I had been stuck up in an alley.” The CEOs also complained that the energy audits and rebates touted on PG&E’s website also result in vastly smaller rebates as advertised, in some cases only 10 percent of what the company was originally promised.

Offermann sees local agencies in some cases hindering efficiencies and other “green” improvements. He charged that the City of Fremont does not want to see Cellotape increase its recycling, because it would mean $5,000 less in monthly waste management costs and reduced revenues to the city.

In response, Kain has worked to increase the influence of the National Association of Manufacturers, both nationally and in California. As a board member, she has tried to get an increased focus on the legislative process and regulation in general. “The politicians are well-intended. None of us want to contribute to atrocities in the Congo, she said. Her view is that we need to balance the burdens, as well as the benefits related to our manufacturing environment. “Our voice is not being heard.”

Thank you to the following business leaders for sharing their insights:
Christopher J. Andersen | CEO and Founder of Assay Advisory
Karen Trilevsky | CEO and Founder of Fullbloom Baking Company
Peter Offerman | President and CEO of Cellotape, Inc.
Hannah Kain | Founder, President and CEO of Alom Technologies
John Lettko | CFO and General Manager of All Weather Insulated Panels