ENTERPRISE RESOURCE PLANNING SOFTWARE IS GETTING MORE EFFICIENT AS IT MOVES TO THE CLOUD
If you have postponed implementing Enterprise Resource Planning (ERP) software, waiting for costs to come down, your patience may now be rewarded.
ERP suites are increasingly being offered in the cloud, making their acquisition, implementation and upgrading much more affordable and efficient.
“What we call post-modern ERP has brought about a more dynamic change in the ERP landscape than we’ve seen in the last 20 years,” says Carol Hardcastle, a research analyst at information technology (IT) provider Gartner.
“Moving to cloud-based platforms drives huge levels of efficiencies,” adds Shanton Wilcox, vice president of the Supply-Chain Practice at Capgemini, a French-based IT company. “It has allowed midsize and small companies to take advantage of advanced ERP solutions at a much lower operating cost.”
Traditional ERP systems combine functions such as manufacturing planning with financial reporting, human resources and order management. “Nowadays, we define ERP as a technology strategy,” says Hardcastle. “It’s a set of business functions and not a singular technology.”
ERP systems still include core elements such as financial reporting and human resources but then diverge to support companies in different sectors such as manufacturing or distribution. “Some ERPs are best suited for specific industry segments,” says Wilcox. “You have to evaluate which is best for your organization.”
Companies also have the opportunity to pick and choose functionality from multiple vendors, a process which has been facilitated by the move to the cloud. “Traditional ERP implementations involved picking a vendor and implementing that vendor’s suite,” says Hardcastle. “These days, companies can implement specialized modules from different vendors that best suit their needs.” This can be accomplished, in the case of cloud implementations, by integrators called cloud-service brokers.
Many smaller companies will continue to opt for a single-vendor approach, according to Wilcox, because of the ease of implementation. “One vendor means a single data model,” he says. “Multiple vendors create challenges in getting data from one part of ERP to another.”
Exporters need their core ERP to communicate with trade management and logistics solutions. “The easier and quicker you can get data from one system to another, the quicker and more efficient your cross-border shipments are going to be,” says Wilcox. On the other hand, some companies may require more sophisticated trade-management functionality than is available in their core ERP.
In general, ERP promotes efficiencies within businesses by automating business processes. “Suppliers get paid automatically,” says Wilcox. “You don’t have to touch the invoice and that promotes efficiency from a labor perspective. Consolidating data within ERP means you get a single version of the truth. You don’t have to spend time and effort pulling data from different sources and trying to align them. You can use that data to understand how the business is performing and where to make improvements.”
“Companies are using data to provide insights to themselves and their customers,” adds Hardcastle. “The promise of post-modern ERP is to process and use data in real time.”
EXPLORING THE GROWING POPULARITY OF FINANCIAL SUPPLY CHAIN PROGRAMS
Since their introduction a mere 15 years ago, Financial Supply Chain (FSC) programs have matured from being a relatively unfamiliar concept to a solution that is widely leveraged, even commonplace, for multinational corporations (MNCs) in particular.
By extending Days Payable Outstanding (DPO) and reducing Days Sales Outstanding (DSO), FSC solutions can significantly improve a corporation’s working capital, in turn reducing dependence on comparatively expensive alternative short-term funding resources such as loans. Greater market recognition of this fundamental benefit has also led to a sea change in how such solutions are rolled out. Just a few years ago, the market still relied on banks to spearhead progress—but now it is corporations, exhibiting greater interest, that are calling for further development.
This behavioral change is largely the result of the 2008 financial crisis, which sharply emphasized the importance of sustainable access to liquidity and made internal sources (such as those unlocked by FSC programs) particularly attractive. Similarly, the flood of regulatory changes that followed the crisis—for example, Basel III’s capital adequacy ratio demanding higher levels of capital to be held on banks’ balance sheets—reduced bank appetite for lending. The post-crisis landscape also amplified the perennial tug-of-war between buyer and supplier—their contradiction in both hoping to increase DPO and reduce DSO—and underscored the importance of strength and stability throughout supply chains.
By circumventing this fundamental buyer/supplier disconnect, the “win-win” scenario created by a well-planned FSC program is attractive to corporations for many reasons—including the resultant improvement in liquidity, decrease in funding costs, strengthened trading relationships and greater stability throughout the supply chain. And as these solutions become relatively commonplace, corporations should now embark on the next evolutionary stage of these programs; fine-tuning their use through the application of detailed, targeted metrics. Not only will this help corporate treasurers squeeze optimal liquidity from their FSC schemes—and ensure they’re strongly positioned to roll out broader, more holistic solutions—but it also responds to the growing market pressure to determine and leverage data at increasingly detailed levels of granularity.
MEASURING THE CASHFLOW BENEFITS
For both Supplier Finance and Accounts Receivable (AR) Finance (the most popular FSC schemes), previously trapped or idle liquidity can be unlocked by contracting the cash conversion cycle (CCC); the movement of cash through inventory and accounts payable (AP), sales and accounts receivable (AR) and back into cash. A shorter—i.e. more efficient—CCC, calculated simply by the difference of DPO and DIO (Days Inventory Outstanding) from DSO, means more cash available for use at any given moment.
While this underlying rationale for FSC management is now widely acknowledged, it is important that treasurers ensure they quantify the monetary benefits—not just to fine-tune their use but also to be able to compare against alternative (external) sources of liquidity and industry benchmarks. Such comparison—against both previous internal data and their industry peers, averages or highest standards—enables a treasurer to identify areas for further improvement. By drilling down into the specific detail of a 24-hour measurement, for example, corporations can gain insight into the exact benefits of these schemes.
The formula to calculate the cash-flow improvement gained over a one-day cycle is straightforward: total annual sales/purchases multiplied by the number of days of improved DSO/DPO divided by 365 (days of the year).
However, such a figure is only indicative of the cash directly generated. To translate this into its worth for that particular corporation, the “applied” value must be considered. For example, where short-term debt has previously been used to maintain liquidity, the cash flow generated from one day’s improvement in DPO/DSO can be used to pay down this debt and is therefore worth “x” dollars’ worth of cost reduction.
Alternatively, if a treasurer chooses to use the liquidity generated to invest in capital expenditures, the “applied” worth could be valued even higher at the corporation’s weighted average cost of capital. Key in all of this is that treasurers use a measurement that best suits their strategic aims.
IMPLEMENTING AND EXPLOITING FSC PROGRAMS
Whether it is Supplier or AR Financing that can best achieve these benefits for a corporation depends largely on individual circumstances. In essence, though, where large, concentrated buyers exist in a field of smaller, fragmented suppliers—e.g. in retail or consumer product industries—the buyers, by virtue of their size and creditworthiness, enjoy lower costs of capital relative to that of their suppliers. In an industry or market with these characteristics, Supplier Financing is more likely to be successful and add the greatest value. In contrast, supply chains where corporations that sell through distributors or those in emerging markets striving to improve sales growth, AR finance (or distributor finance) is often more suitable.
For both schemes, however, uncertainty around the potential costs of implementation remains the most common barrier to adoption. Broadly speaking, with the correct banking support AR schemes can be introduced within very short timeframes. Supplier Finance programs can be more protracted and costly, mainly due to work involved in IT integration and supplier onboarding.
Indeed, for Supplier Financing in particular, implementation must begin with a well-thought-out plan. Once both benefits and costs have been weighed, treasurers must ensure the support and cooperation of all teams and departments internally, as a lack of clear and shared objectives or company-wide alignment can endanger such a project. Secondly, they must ascertain whether trading counter-parties will participate; the procurement team—briefed in the specifics by the supporting bank—must talk to their suppliers about the new financing terms on offer and gauge interest, ensuring the proposed FSC solution provides “win-win” benefits.
Certainly, these programs can only be successful if they improve the terms of trade for both buyer and supplier; one that fails to do so will struggle to onboard trading partners.
That said, the widespread rise of Financial Supply Chain schemes in the past 15 years speaks for itself—testament to the benefits (in regard to both working capital improvements and supply-chain stability) outweighing the complexities of implementation.
Corporations that have yet to implement such programs should certainly explore their potential. But even corporations that have embarked on FSC schemes often have more benefits to squeeze from them—possible only with accurate data, applied to the specificities of their situation. With the right bank guidance, such programs will continue to bring improvements to corporations of all sizes—and strengthen global trade as a whole.
Jon Richman is Head of Trade and Financial Supply Chain Americas, Global Transaction Banking at Deutsche Bank, with previous trade and transaction banking experience in sales, risk and product management.
HOW AIR TRACTOR AND OTHER COMPANIES ARE WORKING WITH THE EXPORT-IMPORT BANK OF THE UNITED STATES
When Trilithic, Inc., an Indianapolis manufacturer of test and measurement equipment, started to export 12 years ago, the company’s commercial bank required it to insure its overseas receivables to collateralize those assets against its line of credit. Trilithic procured such a policy from the Export-Import Bank of the United States (Ex-Im). Though the company now ships 40 percent of its products overseas and is no longer required to carry trade credit insurance, it still maintains its policy with Ex-Im.
Air Tractor Inc. of Olney, Texas, was in a different position. The manufacturer of agriculture and firefighting airplanes exports 50 percent of its products under terms that require customers to pay off the aircraft in five years. To receive its money quicker by selling those loans to U.S. commercial banks, Air Tractor insures the loans through Ex-Im.
“We first vet customers internally to determine whether they are good credit risks,” says David Ickert, vice president of Finance for Air Tractor. “If Ex-Im’s underwriting committee responds affirmatively, we pay a premium and Ex-Im issues an insurance policy for that loan. We then have the ability to sell that loan to a U.S. bank and that lets us roll our cash.”
Trade credit insurance allows exporters to offer competitive terms of sale without insisting on up-front cash or receiving cumbersome and time-consuming letters of credit. Credit insurance protects accounts receivable against customers who can’t pay due to insolvency, political risk, exchange-rate fluctuations and a host of other factors. Policies are available from private-sector credit insurers such as Atradius and Coface as well as from Ex-Im.
“Export credit insurance is bought for three main reasons,” says Walter Kosciow, vice president for Short-Term Trade Finance at Ex-Im. “One is for financing the cash cycle. You want to get cashed out as soon as possible and a lender won’t take the risk without a policy.
Second is for marketing. You’re able to extend more competitive terms to overseas customers. The third is for risk management. You’re able to sleep better at night knowing you can sell to some riskier customers.”
Ex-Im Bank is an independent federal agency that offers trade credit insurance as well as other financing mechanisms, including loan guarantees and direct financing to help foreign buyers purchase U.S. goods and services. (See sidebar.) In fiscal year 2014, Ex-Im Bank supported more than 3,700 export transactions worth more than $27 billion.
“Our business model is based on underwriters being close to the risk, not close to the customer,” says David Huey, president and regional director at Atradius. “We have underwriters in overseas markets who understand the market, the legal situation and the culture so we can advise exporters on where it is safe to sell their products.”
Atradius and Coface underwrite trade credit insurance by accessing a database on millions of companies around the world. “But this information has to be put in context,” explains Kerstin Braun, executive vice president at Coface North America. “Some customers’ balance sheets may look iffy but our specialists can put it in the perspective of the buyer’s country.”
Trade credit insurance generally insures a portfolio of transactions up to a certain limit–the premium being based on the volume of sales, loss history and the quality of the buyers–and offers the opportunity to buy additional protection should the need arise. “We conform to Ex-Im’s underwriting guidance and that qualifies us to self-underwrite up to a $200,000 limit for any one customer overseas,” says Jeffrey Hale, president of Trilithic. “Some of our customers voluntarily supply additional financial information which allows Ex-Im to separately underwrite at a higher limit.”
Of the 50 percent of Air Tractor’s sales that are exported, half are insured by Ex-Im. The other half goes to markets such as Australia, where banks will loan money to customers for this type of purchase. Air Tractor receives cash up front and for the rest, “We are able to move forward with the transaction once we have the insurance and before we sell it to a bank,” says Ickert. “This medium-term credit insurance has allowed us to go from 10 percent exports to 50 percent in 20 years.”
Now that Trilithic is no longer dependent on insurance for financing, and although the company has never experienced a loss, it continues to maintain a policy. “It is one of the lowest cost and most efficient products that we can use for risk management,” says Hale. “The cost of a loss for us would be dramatic and the ROI on the insurance policy is such that it makes good business sense to carry it. The other part is that we are in a cyclical business. Right now we are in a strong period and not borrowing on our line of credit. But when a downturn comes and we want to rely on our foreign receivables, we are ready to go when the bank tightens up.”
SUNSHINE STATE SHIPPERS ENJOY A FANTASTIC BUSINESS CLIMATE AND INTERNATIONAL EMPHASIS
The experience of Airon Corporation is emblematic of many smaller manufacturers in Florida. The company was incorporated in 1997 after acquiring the rights to technology developed at the University of Florida, technology which it then used in a line of life-support respirators that the United States Food and Drug Administration approved in 2003.
In 2007, the company began exporting. These days, Airon exports to 28 countries and half of its revenues derive from overseas sales. “Our biggest export markets are in the Middle East and Southeast Asia,” says Eric Gjerde, the company’s CEO, “but we have sold units on every continent.”
The company’s success is testimony to several conditions present in the Florida business environment: an emphasis on technology, a skilled workforce required for advanced manufacturing, and the infrastructure required for successful exporting.
“Florida is a large export-oriented economy,” says Rick Weddle, CEO of the Metro Orlando Economic Development Commission. “The manufacturing sector is robust and is positioned for growth, especially in the area of advanced manufacturing.”
“We understand the value of international business for our economy,” says Alvin Brown, the mayor of Jacksonville. “Increasing exports is essential to economic growth and creating new jobs. International business accounts for 18 percent of Florida’s economy and Florida companies account for 20 percent of all U.S. exports. We seek to grow exports significantly for the next five years.”
The exporting logistics infrastructure available in Florida is world class. The ports of Jacksonville and Miami on the Atlantic coast and Port Tampa Bay on the Gulf coast are among the largest ports in the country. Numerous other ports dot both coasts, including Port Canaveral and Port Everglades. The ports enjoy good road connectivity and rail lines such as Florida East Coast Railway.
Florida’s best international airports also hosting international business, perhaps in unexpected ways, by facilitating visits from customers as well as travel by Florida-based employees. The fact that Florida is a major tourism destination doesn’t hurt.
Germfree Laboratories, a manufacturer of hospital pharmacy and industrial safety equipment located in Ormond Beach in the greater Daytona area, has customers visit their facility at least twice to sign off on manufacturing plans before they build and ship their products. “We are building complex lab facilities so we need to sit down with them to review architectural and engineering plans,” says Keith Landy, the company’s CEO. “There is a willingness for customers to come and visit us because we are in Florida where they can take in NASCAR races in Daytona or the attractions in nearby Orlando in the same trip. This has proven to be beneficial to us. In fact, it is unique.”
The tourist traffic through Orlando—and the numerous airlines that it attracts—has its benefits for business travel as well. “One of the things that drew us to Florida was the ease of travel,” says Bob Provitola, general manager at Mitsubishi Hitachi Power Systems Americas, which has a factory in Orlando and a headquarters in Lake Mary. “We travel a lot and we can get to many locations with just one flight. That has saved us a lot of time and money.”
The government of Florida has introduced a broad portfolio of tax and other incentives designed to draw manufacturers to the Sunshine State. (See sidebar.) “The state has a well-rounded pool of incentives to attract business to Florida,” says Provitola. “The governor himself is involved in some of the bigger deals.”
When Hudson Technologies, a maker of metal enclosures, relocated from New Jersey to Ormond Beach in the 1990s, the state government provided incentives for the acquisition of land as well as aid for moving personnel and equipment south. “The incentives came in the form of tax rebates,” says Mark Andrews, the company’s former CEO and now chairman of the Volusia Manufacturers Association. “This dramatically reduced our costs of relocation.” Around half of Hudson’s sales are shipped to export markets in Ireland, China, the Middle East, Mexico and Canada.
The government earns praise for organizing and promoting export trade missions which have proven indispensable, especially for smaller manufacturers. “Trade missions are a tremendous asset for smaller manufacturers,” says Provitola. “The governor often travels with these groups and this has allowed these companies to benefit from high-level meetings in other countries.”
“We always bring businesses with us and we try to make matchmaking appointments when we travel overseas,” says Stuart Rogel, CEO of Tampa Bay Partnership, an eight-county economic development organization. “We also work with American chambers of commerce in each country as a source of networking and business leads for our companies.”
Correct Craft, the Orlando-based manufacturer of Nautique boats, has attended several international trade shows with the support of the state. “We have international boat show support from the state which is very helpful as we promote our products around the world,” says Bill Yeargin, the company’s CEO. “We have attended several times and we are getting ready to again soon in Spain. We have a government that feels supportive and agencies that are helping us promote our product around the world.” About one-third of Correct Craft’s products are shipped to export markets.
“The state has been great at putting together trade delegations and we have used them since early on to get into trade shows,” says Landy of Germfree.
His company has also made good use of economic development assistance in Volusia County since moving there from Miami in 2001. “It’s easier to take advantage of these types of resources in a smaller community,” says Landy. “The local economic development people were instrumental in introducing us to Export-Import Bank programs, in helping us attend international trade shows, and introducing us to commercial attachés in U.S. embassies overseas who have helped us in international markets.” Since 2001, the proportion of Germfree’s sales attributable to exporting has skyrocketed from 5 percent to 60 percent.
Advanced manufacturers that have located in Florida have found an ample pool of skilled labor to man their facilities. Central Florida has benefited from the national space center located there and the engineers and other high-tech types that it has attracted. “We think of ourselves as an engineering company that does advanced manufacturing,” says Provitola. “Incentives got us interested. We came here because of the workforce.”
“The labor market here is great,” says Airon’s Gjerde. “We don’t have a problem finding good people and they stick around here for a while.”
Florida’s sunny climate and good quality of life also attract good people, notes Landy. “But for the future, the public education system required more attention,” he says. “When the economy went bad, education budgets were slashed. Our region would attract even more business if public education was in better shape.”
“Advanced manufacturing requires working with very high-cost and highly technical machines,” adds Provitola. “Developing a strong labor pool requires a better commitment from state and local governments to middle schools and high schools. Students and, more importantly, parents need to be informed that there are great careers to be had in manufacturing.”
Some Florida businesses could also use a lesson in exporting, according to Jacksonville’s Mayor Brown. The city was recently selected to participate in the Brookings/JPMorgan Chase Global Cities Initiative.
“This will allow us to strengthen our competitive position globally by developing a regional export plan and a foreign investment strategy,” says Brown. “Our Global Cities team conducted a comprehensive market assessment and found that many companies were unaware of the services and programs available to help them enter export markets. These companies have the potential to export, but they need to know it’s within their reach.”
HOW SHIPPERS LIKE AMERICAN HONDA ARE MAXIMIZING RAIL SERVICE
We are heavy rail users. It is an integral part of our logistics network,” says Dennis Manns, vice president for Sales and Logistics Planning at American Honda. “We are dependent upon our rail partners for movement of all of our automobiles out of all our plants.” American Honda is a net exporter of automobiles, having exported more than 100,000 U.S.-made Honda and Acura vehicles in 2013.
“Our exports have been growing,” says Manns. “We do a lot of exporting by rail directly to Canada and Mexico and expect that business to grow.” American Honda currently exports to 49 countries from operations in Ohio, Alabama and Indiana through ports in California, Florida, Georgia, Maryland and New Jersey.
Choosing to put products bound for export on the nation’s rails can be an agonizing choice for many shippers. Compared to trucks, rail will almost never be the cost-effective choice for hauls less than 500 miles, and it will always be the slower of the two.
But shippers like American Honda warn us that the railroads should not be ignored. For longer hauls, rail transportation will save you a lot of money. And it’s the more fuel efficient, greener alternative to trucks that has the added benefit of not tearing up the nation’s highways and byways. In at least one case—exporting to Mexico—rail is a quicker, more efficient option, and shippers should be able to negotiate advantageous rates over that lane.
But the secret to getting the most out of rail is to be your own supply chain expert. Playing it smart can maximize the value of rail in your logistics program.
American Honda maintains a fleet of its own rail equipment to facilitate the flow of its automobiles through the rail network. “There is a cost savings involved,” says Manns, “but the most important reason for doing this is that it helps us to maximize lift capacity at the plant and integrating our operations with the overall rail network. This has become especially important of late as rail equipment is at a premium.”
The key to the success of American Honda’s relationship with its rail partners is its continuing communications with the carriers.
“The railroads provide three things,” says Manns, “a supply of empty cars, labor to move the product, and power. Two out of three doesn’t work. So we need to know of the carrier’s labor issues and any shortages of power or empty car supplies. Communications become paramount. We need to know how the railroad is operating on any given day and week.” (See sidebar, “Load Up On Advice!”)
To that end, American Honda has also evolved to integrate its information systems with that of its rail providers.
“Shippers have become more sophisticated in how they look at their supply chains,” says Tom Finkbiner, an intermodal industry veteran and CEO of Tiger Cool Express.
“The growth in rail commodities in the last 10 to 15 years is more a result of supply-chain professionals learning to live with the inconsistencies and slow service of the railroads than the railroads improving service to the customer.” Tiger Cool Express provides domestic refrigerated intermodal service for produce and also transports meat exports from the Midwest to East and West Coast ports. As such, it is a customer of the Class I railroads.
Goya Foods, Inc. exports by rail directly to Mexico and plans to do a whole lot more of that once its newly-opened facility in Brookshire, Texas, gets revved up. “The advantage of exporting by rail to Mexico is that it is an integrated move,” says Matthew
Montour, the company’s director of Logistics. “That means you don’t have to unload shipments at the border for inspection, warehousing and transfer to other carriers, as you do with trucks. That process costs money and causes delays.”
Rail shipments are typically cleared, not at the border, but at the through destination. “That makes it a little bit easier to get across the border and it also means less delays at the border,” says Montour.
A healthy proportion of the output of Goya’s Brookshire facility is planned for shipment to Mexico, notes Montour. Union Pacific and Kansas City Southern, two U.S. Class I railways, together with Ferromex, the largest rail consortium in Mexico, jointly offer direct service from Houston to San Luis Potosi, about 250 miles north of Mexico City and the location of a large rail terminal.
“When you look at rail transit times, they aren’t a lot faster between major markets than they were 50 years ago,” says Finkbiner.
“In cases of shipments that get handed off between carriers as they cross the Mississippi, service is actually a little worse.”
To make matters worse, the weather troubles of the last winter exposed rail capacity shortfalls. Surprisingly, the fastest growing commodity moving on the rails is crude oil.
“There is less capacity in the system than was formerly thought,” says Finkbiner. “The railroads are dedicating a lot of capacity to moving oil from North Dakota and the Permian Basin [in southeastern New Mexico and west Texas] both east and west. These shipments move on dedicated unit trains that move at high speeds and take up lot of track capacity.”
Despite these performance problems, the railroads still provide an attractive alternative to trucks, according to Finkbiner. “The long-haul economics of rail is superior to that of trucks,” he says, “and it is a greener and leaner methodology of moving freight.”
Intermodal can save shippers as much as $500 to $600 per container—some 25 to 30 percent—as compared to long-haul truck service, according to Montour. “We decided six years ago to convert all of our long-haul trucking to intermodal, even if there was only a small saving,” he says. “Many of our industry peers are doing the same.”
For rail to work on a large scale, the shippers have to be mindful of the needs of their carriers. “You have to be able to position equipment from a location that ships a lot of cargo to another location that is advantageous from the railroad’s standpoint,” says Montour.
In fact, the availability of equipment is perhaps the key issue facing rail carriers in their relationships with their customers.
“Refining the delivery cycle of empty equipment so that we can get shipments under load is the single biggest struggle American Honda has with its rail carriers,” says Manns.
Repositioning equipment to Mexico happens to be one of those moves that helps carriers deliver equipment to their customers.
“The railways need equipment positioned in Mexico to handle all of the manufactured goods that are coming north,” says Montour.
“It is sometimes difficult to find equipment in Mexico for shipments that need to go north because there is not as much southbound cargo coming through.”
In other words, if you are able to export to Mexico via rail, you will be looked upon favorably by the carriers and should be able to negotiate a pretty good deal with them.
HOW CALIFORNIA IS HELPING A MAKER OF INDUSTRIAL SAFETY GEAR AND OTHER SHIPPERS
Innovation is built into the DNA of the state,” says Roy Paulson, president of Paulson Manufacturing Corp., a maker of police and industrial safety gear in Murrieta, Calif. “We have several patents associated with our business.” Owing to a network of top-notch universities and an atmosphere that encourages innovation, three out of five patents filed in the United States now originate in California.
For manufacturers seeking an environment imbued with innovation and world-class export logistics, the Golden State has plenty to offer. The state faces the Pacific Rim and some of the world’s fastest-growing economies. “The ports of Los Angeles and Long Beach are served by good rail and truck services,” says Paulson. “We also have a high concentration of expatriates from Asia, many of whom are entrepreneurs who have contacts back in their home countries. California is well positioned to take advantage of the future.”
California is not the place for manufacturers looking for the lowest costs or for an anti-union labor environment. But the Governor’s Office of Economic Development, as well as localities, provide a variety of incentives and other programs to help companies invest in California. The state government just recently introduced an income tax credit to encourage investment and job creation, particularly by small businesses. (See sidebar, “Golden State Opportunities.”) The state also runs a robust program that helps companies find new export markets.
The California State Trade and Export Promotion (STEP) program has helped nearly 300 California businesses participate in trade shows on five continents. “Many of these companies were new to exporting,” says Jeff Williamson, STEP director. “We are here to help small businesses begin to export or to enter new markets.”
Local governments also run programs to encourage manufacturing and exporting. “The City of Murrieta has a strong focus on encouraging the growth of both of these areas,” says Bruce Coleman, the city’s economic development director. “We recognize that with the growth of the global middle class, there is an excellent opportunity for our companies to grow locally by expanding their market for products overseas.”
The Riverside County city is a leader in the regional District Export Council that provides companies with information to help them find and grow export markets. The city arranges meetings with the regional representative of the Export-Import Bank of the United States to help companies with exporting financing and has hosted the Export University in conjunction with the U.S. Commercial Service (USCS).
“We are the only city in inland Southern California to have entered into a partnership agreement with the USCS to promote the growth of manufacturing and exporting,” says Coleman. “Murrieta regularly welcomes delegations from China, India, Vietnam, Singapore, Indonesia and other countries and invites regional manufacturing companies to meet with international delegations at City Hall so that we can encourage business growth here.”
The city also regularly works with manufacturers and area brokers and developers to help companies find locations for their businesses. Murrieta has created an incubator where for $1 per year a startup can find space. Coleman is personally involved in helping companies with the process of getting permits. “One call or email to me and we are on it,” he says.
Paulson Manufacturing, which has been located in Murrieta since 1947, conducts most of its engineering and all of its manufacturing at its headquarters. “We have been able to attract a good engineering team in California to bring our concepts to reality,” says Paulson. “We build all our own tooling here and also manufacture and distribute from this location.”
KPI Ultrasound of Yorba Linda also relies on a highly skilled workforce to refurbish the used ultrasound machines that make up 40 percent of the company’s business. “We have always been able to find a fair amount of skilled labor and this has allowed us to grow,” says Jonathan Ames, the company’s director of Marketing. “Our staff is small but they are all skilled at what they do.”
Fabricating products where they are designed and engineered is a recurring theme in California. “This helps reduce lag time in getting new products from development and into production,” says Margot Lederer Prado, a senior economic specialist at the City of Oakland Office of Economic and Workforce Development. “It also helps protect intellectual property and facilitates customization of products.” Oakland tends to attract value-added manufacturing companies that do not require very large footprints.
Companies throughout the San Francisco Bay Area will soon be able to take advantage of Oakland’s expanded free trade zone. “We have applied to expand FTZ 56 to include sites within 60 miles of Oakland,” says Prado. “This will be valuable for advanced and value-added manufacturing companies that will bring goods into their facilities directly from the Port of Oakland and then re-export them.”
California’s STEP program requires several qualifications of companies interested in participating. They must be in business for at least one year, be profitable, meet the U.S. Small Business Administration’s definition of a small business, and must have an export market plan in place. Companies that otherwise meet the criteria but don’t have an export plan are referred to the state’s exporting training education programs which are run through California’s community colleges.
“That is how these two programs dovetail together,” says Williamson. “There are about 70,000 direct exporters in California and about 150,000 indirect exporters. There are a very large number of companies in California that could be exporting.”
KPI Ultrasound started with STEP three years into an effort to expand its sales in China and South America. Sixty-five percent of the company’s revenues currently come from exporting, with Canada and Mexico receiving the largest chunks. With STEP’s help, China has emerged as a key market outside North America for KPI.
“STEP helps reduce the costs of participating in trade shows overseas,” says Ames. “They help us navigate the registration process and provide an understanding of the costs involved. They provide a bilingual representative who understands the process and who can answer any questions.”
Before STEP, KPI tended to send a sales rep to walk a trade show. “Now we have a booth there as part of STEP’s California pavilion,” says Ames.
Ames credits participation in STEP with as much as $1 million in export sales to China. Another STEP trade show helped generate sales in Chile.
DIH Technologies of San Diego, manufacturer of medical devices and another STEP protégé, also took advantage of the logistics and cost savings benefits of participating in a trade show with STEP. Company president Jason Chen attributes orders of nearly $1.3 million to its participation in a trade show with STEP in Xiamen, China, last year.
“Besides the tangible, there are also intangible benefits,” says Chen. “If customers feel we are being helped by the government, that adds some reputational benefit.” Chen expects 60 percent of DIH’s revenues to be derived from exporting within the next five years.
As for Paulson Manufacturing, about 15 percent of its output is exported directly. Another unknown proportion is sold to distributors and then exported. “South America, China and India are our highest growth export markets right now,” says Paulson. “We project 2014 to be our best yet and a lot of that has to do with what we have going on internationally.”
HOW INCENTIVES AND STATEWIDE BUSINESS FRIENDLINESS DREW THIS EXPORTER AND MANY OTHERS TO TEXAS
For Bell Helicopter, incentives played a key role in its decision to locate a factory in Amarillo, Texas. The rotocraft manufacturer received more than 1,200 proposals as part of a nationwide search in 1999. The Amarillo plant, originally opened to manufacture Bell’s line of military helicopters, including the V-22 Osprey tilt-rotor aircraft, has since relied on more incentives when expanding to accommodate the assembly of commercial aircraft.
“Bell Helicopter’s presence in Amarillo is entirely the result of a competitive incentives package not only in its initial construction, but also through many phases of growth,” says Chris Stone, general manager of Bell’s Amarillo Assembly Center. “The city and the Amarillo Economic Development Corporation presented a compelling proposal that included 214 acres of land right off the airport, buildings built to our specifications, assistance with infrastructure, and relocation assistance for the first 30 employees transferring from Fort Worth.”
Bell’s original presence in Fort Worth was not the result of state or local incentives, Stone notes, though incentive packages put forward since then have helped the company choose Fort Worth as its global headquarters. The company opened its new global headquarters there in April.
To date, Amarillo and its economic development corporation (AEDC) have invested more than $120 million through seven Bell expansions. “Our obligation is achieved through employment and local spend,” says Stone. “We pay back 110 percent of their investment each year for 20 years.”
The incentives offered to Bell Helicopter included an abatement on lease payments for the buildings provided by Amarillo, notes Buzz David, CEO of the AEDC. “They haven’t made a lease payment in the last 15 years,” he says. The incentives are contingent upon Bell maintaining or expanding its payroll in Amarillo and in generating a sufficient level of sales from outside the Amarillo area.
Those are the two criteria Amarillo looks for when doling out incentives: the creation of above-average wage jobs and sales outside of the region. While exporting is not a specific criteria that Amarillo, the state of Texas or other localities look for when awarding incentives, “Most of the companies in the primary industries that we look at are by definition exporters,” says David.
Sugar Land, a city located 20 miles southwest of downtown Houston, takes a somewhat different approach. “Our incentives are not directly related to exporting but one of our targeted industries is major exporters,” says Jennifer May, acting director of the Sugar Land Economic Development Corporation.
Bell Helicopter produces a full line of military products in Amarillo, such as V-22 Ospreys, UH-1 Huey transport helicopters and AH-1Z attack helicopters. “All of these are being marketed throughout the world to allies through the U.S. government,” says Stone. “In June 2013, we also began work on a commercial product, the Bell 525 Relentless, at our recently opened, 249,000-square-foot facility on the same site. We are preparing for first flight in late 2014, followed by certification and production for sales around the world as quickly as possible thereafter.”
Despite the generous incentives offered by the state of Texas and its many localities for manufacturers looking to expand there, not every company finds it necessary to take advantage of them.
Goya Foods built new manufacturing and distribution facilities for its canned beans and sauces on a 130-acre site in Brookshire, 35 miles west of Houston.
“Basically, we were looking for land and water and we were able to find them in Brookshire,” says Bob Unanue, Goya’s CEO. “Texas has a business-friendly environment and no state income tax, and those were incentive enough for us.” The Brookshire distribution facility went operational in September 2013 and the factory opened in October. Goya has operated other facilities in Texas for years.
The company is using its Houston facility as a platform for exporting to several continents. “Our products are sold all over the world,” says Unanue. “We’re exporting from Houston to Central and South America, Europe and Asia. Around 15 to 20 percent of the product produced in Houston is exported.”
Most of those exports are loaded in the nearby Port of Houston, the nation’s biggest export gateway. But the area’s excellent rail links allow Goya to ship export products to West Coast or East Coast ports as well. “We brought a rail spur right to the front of our property,” says Unanue. “It’s easy to ship product from there to Canada and Mexico, to all over the country, and from there around the world.”
“The Houston area has recovered 2.4 jobs for every job lost during the Great Recession,” says Bob Pertierra, chief economic development officer at the Greater Houston Partnership. “We lead the nation in exporting and Texas has the country’s highest concentration of manufacturing. Our airports are offering new services to places like Turkey, Korea and China. Mexico is our largest trading partner and our proximity provides significant opportunities for companies.”
A Turkish pipe manufacturer, Borusan Mannesmann Pipe U.S., Inc., announced last year a capital investment of $148 million to create 900 direct and indirect jobs in the region. “Borusan will be importing and exporting out of the Port of Houston,” says Pertierra.
The Houston area—the city, as well as some of the surrounding communities—offers tax exemptions on inventory detained in the state for less than 175 days for the purpose of assembly, storage, manufacturing, processing or fabricating. The City of Houston and some nearby localities also exempt eligible inventory from the ad valorem property tax. Ten-year property tax abatements are also available from some cities and counties in the region. A minimum real-property investment of $1 million and the creation of 25 new jobs are required to be eligible for a tax abatement by the City of Houston and Harris County. Houston also has Foreign Trade Zone No. 84 that allows companies dealing in foreign trade to delay payment of U.S. Customs’ import duties until their goods and merchandise enter U.S. commerce.
Sugar Land has an active program of attracting companies through incentives. So much so that the city, with an occupancy rate of more than 90 percent, is rapidly running out of office space. “We are still looking to expand through new construction or redevelopment,” says May, the EDC director.
Sugar Land recently provided an incentive package to Texas Instruments to move into a new facility based on job creation and capital investment numbers. The company will be creating 375 jobs with average salaries of $100,000. The city will be paying the company $2.5 million over 10 years.
“We focus on return on investment,” says May. “The company has to maintain its jobs and investment levels in order to receive the annual payment.”
One of Sugar Land’s unique logistics features is its regional general aviation airport. The airport boasts an 8,000-foot runway, a state-of-the-art air traffic control tower and radar system, and the presence of U.S. Customs and Border Protection.
“That way, someone can fly into Sugar Land and clear customs without having to go through Houston or some other international airport,” says May. Several Sugar Land-based companies maintain hangars at the facility.
Companies that have chosen to locate in Texas are happy with their choices. “We believe we have a strong future in both Amarillo and Texas,” says Bell Helicopter’s Stone. “The production of the new Bell 525 Relentless in Amarillo will help us balance our commercial and military business.”
Goya has the possibility of quadrupling the size of its facility in Brookshire and CEO Bob Unanue is enthusiastic about future expansion possibilities. “We currently employ 250 people in Brookshire,” he says. “Hopefully, the facility will double in size over the next six to 10 years and we can easily double employment.”
Among other things, the company plans on expanding the plant’s output from beans and sauces to meats, cheeses and frozen prepared foods. “The sky’s the limit,” says Unanue.
For Keats Manufacturing Inc., opening a facility in El Paso, Texas, paid off in a big way. Founded in 1958 near Chicago to supply precision metal stampings, wire forms and assemblies to the electronics, medical, consumer goods and automotive industries, the company moved near the Mexican border in 1994 to take advantage of growing manufacturing activity south of the border and increased United States-Mexico trade under the North American Free Trade Agreement (NAFTA).
Starting in a 5,000-square-foot rented warehouse, Keats Southwest—the designation of the company’s expansion—has since moved into a custom-built 30,000-square-foot facility and has seen its business grow from $1 million to $10 million per year. Just about everything Keats produces in El Paso is sold to assembly plants in Mexico.
“We already had $1 million worth of work in Mexico in the early 1990s,” says Matt Keats, president of Keats Southwest. “My brother and I were making sales south of the border and we saw a boom of assembly plants and we said, ‘Wow, there is a lot of potential down here.’” Matt’s brother, Wade Keats, heads Keats Manufacturing Inc., the original Keats plant in Wheeling, Illinois.
Keats Southwest operates a set of sophisticated equipment used for metal stamping, wire forming and punch pressing that enables the company to supply a diverse array of parts for manufactured products custom designed for specific applications. “Not a lot of companies have all of these capabilities,” says Matt. “When we first came to El Paso, no one else was doing what we were doing.”
Keats’ machines produce parts that are incorporated into manufactured products by companies like Honeywell, Siemens, Delphi, Molex, AO Smith, Cooper Bussmann, White Rogers, Scientific Atlanta and Emerson. “We make 25 to 30 parts for Chamberlain garage door openers alone,” says Brad Keats, an account executive at the company and Matt’s nephew.
Keats Southwest has benefited from the large-scale growth in the manufacturing sector in Mexico, some of which has come at China’s expense. “It has become more cost effective to move assembly operations from Asia to Mexico,” says Brad. “With fuel costs rising and with the sheer distance between the U.S. and Asia, it is making a lot more sense to manufacture on this continent. We’ve seen a lot of our customers move entire assembly lines from China to Mexico.” In recent years, Mexico has become a manufacturing hub for many automotive and aerospace manufacturers. (For more, see sidebar, “Mexico Auto-Parts Manufacturing Shifts Into High Gear.”)
Keats Southwest has benefited from NAFTA, thanks to the agreement’s provisions that U.S.- and Mexico-origin products can move back and forth between the two countries duty free. At the same time, because of the way Mexican assembly plants operate, the company avoids the hassles of shipping its products across the border.
“Our customers pick up orders at our plant or we deliver them to their docks in El Paso,” says Brad. “The customers handle the logistics of the border crossing.”
“We aren’t involved with any export paperwork or duties which is kind of nice,” Matt adds. “We would need a bigger staff if we had to handle all of that.”
There are a few reasons why logistics are handled on the Texas side of the border and why Keats Southwest finds it beneficial to remain in El Paso, rather than relocating to Mexico.
“Logistics is huge in El Paso,” says Robert Queen, director of the U.S. Export Assistance Center, a unit of the U.S. Department of Commerce’s Commercial Service in El Paso. “There are a tremendous number of logistics companies and customs brokers located here, and these logistics companies support a large percentage of U.S. exports to Mexico. We are talking about 3,000 truckloads passing between El Paso and Juarez every day across the border.”
There is also a great deal of warehousing space available in El Paso. “There are large spaces available for sale or lease,” says Queen. “There are small spaces and sharing opportunities and plenty of real estate brokers lined up to help in this area. Warehousing in El Paso is much cheaper than on the Mexican side. That’s why a lot of inventory is kept in El Paso while in Mexico they concentrate on assembly.”
At the same time it is advantageous for Keats to manufacture in El Paso. “There is a reason why we are on the border,” says Matt. “It makes for a huge reduction in freight costs for our customers. We are shipping metal and that gets heavy. The freight costs would add up if our customers were buying from Connecticut or Chicago.”
Matt says the U.S. side of the border is also better for recruiting the highly skilled workers required to operate Keats’ more technical machinery. “It would be difficult to locate people with the right level of skill on the Mexican side of the border,” he says.
In fact, when Keats Southwest first opened shop, the plant was manned by technicians who had relocated from the Illinois facility. “We didn’t move to El Paso for cheaper labor,” Matt says. “When we first opened in 1994, I brought six guys from Chicago because they knew the equipment and the business, which is so rare down here. We had to convince people to come down with us and the way we did that was to give them incentives. If we had put an ad in the newspaper we wouldn’t have gotten anyone.”
One of the keys to successfully supplying assembly plants in Mexico is to adhere to and become certified under international quality standards. “Mexican manufacturing plants are now demanding much higher quality standards,” says Queen. “All Mexican manufacturers need to trace back where their materials came from and who has handled them. ISO 9000 is the general quality standard for manufacturing and there are other, more specific standards for the aviation and automotive industries.”
Keats Southwest follows and is accredited through two sets of quality standards: ISO 9001:2009 and TS16149. The ISO standard requires a detailed system of documentation so that parts can be traced in the case of failure. TS16149 is a more rigorous standard, according to Brad Keats, which is applicable specifically to automotive manufacturing. The company is also working toward certification under ISO 14001, an environmental standard.
“That is all about setting goals for reducing our environmental impact,” says Brad. “In our case, it means reducing the amount of lubricant-oil waste we produce.”
Certification means undergoing annual audits under both sets of standards, a process that takes five days for each. “There hasn’t been an audit where we haven’t been asked to make corrective actions,” Brad says. “But it’s all about becoming a better company, making better products, delivering on time all the time, and making sure that there is no chance of any defective products going out the door.”
The company also has to ensure that its suppliers are ISO certified. “We can’t even look at them unless they are certified under ISO 9001 at a minimum,” says Brad.
Although Keats Southwest is not subject to the documentation requirements of NAFTA—since it delivers on the U.S. side of the border—Brad believes the trade agreement has made a positive difference in how the company operates. The company’s Mexican customers demand frequent, small, just-in-time delivery of product, not only for the sake of efficiency but also because Mexican law taxes inventory if it is stored too long.
“Instead of releasing parts monthly,” Brad says, “we are doing it weekly or even daily. This is making us a leaner company by ordering smaller quantities of materials from our suppliers. We used to make bulk purchases of supplies to get the price down. Now we are asking for just-in-time deliveries, but we can negotiate a good price by issuing a blanket purchase order.”
One way Keats Southwest develops new customers is by attending B2B get-togethers sponsored by the local U.S. Export Assistance Center. The center also offers a Gold Key program which sets up individual U.S. companies with several potential Mexican customers, for a fee.
“We have found the B2Bs to be extremely successful,” says Matt. “We used to do two or three trade shows a year but they are going by the wayside in our industry. They don’t seem to draw decision makers anymore. We are putting more money into our website and that is where most of our inquiries are being generated.”
But Matt believes that getting face time with potential customers is still the best way to present the unique capabilities of his company, and that’s where the B2B luncheons come in. “We landed Honeywell as brand new account after meeting them at a B2B,” says Matt. “It took close to a year to get an order from them. They did their own quality assessment of our plant even though we are ISO certified.”
Honeywell is just the latest achievement in an ongoing success saga for Keats Southwest. “We went from six employees and six production machines to 50 employees and 50 machines running on three shifts,” says Matt. “We went from one million to 10 million dollars in sales. I’d say coming to El Paso was a great move. It was the best move we ever made.”