Inside New Jersey Manufacturing

October 26, 2017

(Editor’s Note: This is the keynote Mitch Cahn gave at the CIANJ Manufacturing Summit held recently at the Anheuser Busch Brewery in Newark.)

Unionwear makes textiles, from scratch, in Newark, 11 miles from Manhattan, in a union shop—and business has never been better. In fact the only thing limiting our growth right now—and by right now I mean THIS month—because things change so fast now–is that we can’t hire enough machine operators.

I’m going to guess that many of you are in the same situation.

So why is the national dialogue about domestic manufacturing painting us as victims?

I’m going to read an excerpt from a NY Times article which was recently forwarded to me by a number of concerned relatives:

EAGER TO CREATE BLUE COLLAR JOBS, A SMALL BUSINESS STRUGGLES

Anita Quillen, owner of Diversified Engineering & Plastics, belongs to a much mythologized class in American life: small business factory owners. Politicians heap praise on them, campaigning in their factories and extolling their enterprises as engines of good jobs and wages.

But reality is more complicated.

To own a small manufacturing business is to shoulder so many worries you hope your children find an easier career, and to realize how little the airy pronouncements of politicians describe your reality.

I’m going to stop here because the article is just too sad to continue. In fact—let’s give this factory and it’s struggles a moment of silence.

The article describes a lot of economic and social problems with the broad theme that they are out of the control of the factory owner, and the effort she is putting in to improve her business in the face of these problems have fallen flat, and that she’s gotten nothing but lipservice from the politicians who extoll her.

Now I told you where I’m coming from—but where is she coming from?

I agree domestic manufacturing is not the easiest way to make a living.

We face many of the same issues Dearborn faces—millenials not applying for jobs, losing business to China…but we look at every problem as an opportunity, as in “Wow, we just survived another quarter with THIS monkey on our back… think of how good next quarter is going to be when we send this monkey back to the circus!”

To a manufacturer every problem is a math problem—there is a solution in there somewhere.  Sometimes the solution costs more than the problem and you pivot.  Sometimes you may have to bring in a ringer to solve your problem

And sometimes you may have to solve a problem that exists outside of your factory, using the same ingenuity that led you to invent products, mass produce them, automate that production, and outsell competitors who have an unfair advantage.

Think about the biggest systemic factors that impede your growth or threaten your business.

For us it’s our aging workforce and our difficulty replacing them with millennials.  How are politicians going to fix that for manufacturers?  They can’t.  How about regulatory threats? Most of the time, regulation of manufacturers is actually the government’s solution to a larger constituency’s problem, so of course you are going to get lip service when you ask those same politicians for help.

This is why manufacturers need to troubleshoot systemic threats from the outside the same way they use continuous improvement and six sigma projects to troubleshoot people, design, product, and machinery problems.

Manufacturers know how to solve any complicated problem that occur inside our factories using trial and error, planning, and engineering.  These techniques work—we just need to use them on a bigger game.

For Unionwear, the biggest regulatory threat right now is a minimum wage increase that will put us at a huge disadvantage to our competitors in most manufacturing states.

That’s not because Unionwear pays minimum wage—we don’t.  But we also don’t pay entry level workers $15 per hour either.

The real issue with the minimum wage increase is relative pay.  A minimum wage increase greatly shrinks the gap between your newest worker and your best worker. Workers who get a small increase or no increase feel cheated when less experienced workers receive large pay increases.

State level minimum wage increases may hurt the fast food industry less than manufacturers, because no one is going to drive to Philadelphia to get a quarter pounder, and the consumers of fast food will have more disposable income.   But someone would order 10,000 hats from Philadelphia if they were a nickel cheaper.  And our customers, nearly all of whom live outside of New Jersey, won’t see spending power increase.

What we project will end up happening based on the last big jump in minimum wage in 2006 is that all wages will go up about $6 per hour. Which means my small business will cost an extra $1000 an hour with opportunity to increase the top line until other states or the federal minimum wage is increased.

I’m not going to ask for another moment of silence here because we are already taking matters into our own hands.

In 2006 we responded to the minimum wage increase by going to NJMEP and asking them to help us stay competitive. They responded with a grant to implement lean manufacturing in our factory. It was so successful that we ended up doubling our labor force and quadrupling our production.

By the time 2008’s federal minimum wage increase brought the rest of the country up to our level, we already were able to compete with states that still had a $5 minimum wage—so when their wages went up, we actually became the domestic low cost provider of our products.

Now we still constantly work to improve productivity, but that alone is not going to save us from death row.

Our first line of defense is to come out here and talk to other manufacturers about it.  Together, manufacturers are a major force in New Jersey—10,000 strong, employing 360,000 workers.  I say “together” but how often are we really together?

Ten years ago, there was almost no opportunity to meet with other manufacturers in New Jersey. Our sector was left for dead. But NJMEP started the Made in NJ program, and a number of Newark manufacturers started the Made in Newark program, and we gave our sector some real visibility.

Were there results? Yes—you are here.  We celebrated Manufacturing Day last week. The Manufacturing Talent Network is here offering real programs.  People know this sector is alive!

When manufacturers get together they love to compare notes, share resources, and create joint ventures. One thing to add we need to add to that is build a collective voice.

And with that collective voice, we can ask our legislators, “Have you thought about how you are going to replace the 360,000 manufacturing jobs in New Jersey that will disappear after a minimum wage increase?” Because I bet they haven’t thought about that.

Most other sectors with low wage employment will not lose business to other states—because they are in the service and healthcare industries, which are local, or in industries that are not as labor intensive as manufacturing.

We need to get our legislators to think—or better yet, we need to start thinking—of a compromise that will soften the blow of an inevitable minimum wage increase to New Jersey’s manufacturing employment.  A corresponding tax break, a phasing in, something to stop the job loss.

Notice  I’m not talking about 10,000 factories throwing in the towel, though some will.  I’m talking about job loss because this wage increase will accelerate automation in manufacturing.

If the minimum wage increases to $15 next year, coupled with Obama care and some local and state leave ordinances, an entry level worker that cost us $15,000 per year in 2008 will cost us a legal minimum of $36,000 in 2018.  That’s for a kid to sweep the floor or trim loose threads with a scissor.

In 2008 an unskilled, untrained human cost $15,000 a year and a robot to do the same probably cost $2 million.

In 2018 an unskilled, untrained human will cost $36,000 a year and a robot to do the work of three unskilled humans in many instances will cost $20,000.  You can see where that is going:

The minimum wage increase is going to accelerate manufacturing’s evolution into automation.

There are so many buzzwords in technology and business that are very quickly becoming exciting opportunities for small business manufacturers and automation is just one of them.

Cloud technology and software as a service has made it possible for small businesses to use ERP systems previously only available to large enterprises.

Mobile technology has brought real time data capture and information access to cellphones in the hands of production workers.

Big data analysis allows factories to better predict the flow incoming contract work and quickly identify factory bottlenecks.

Small companies like Unionwear are already capitalizing on artificial intelligence that’s built into our CRM, email server, and automated marketing suite.

The internet of things allows computers to track goods through the factory, analyze production in real time, and monitor preventative maintenance.

The cost of all of these things is falling faster than I ever thought possible. In fact, even though industrial real estate, even in Newark, is becoming unaffordable and labor prices are increasing, look at all of the things that cost way less than they did a decade ago—remember phone bills? Remember when computers weren’t practically free? Remember $4 gasoline?  This is an exciting time to be a manufacturer and ride the technology wave into a competitive future.

De-skilling goes hand in hand with automation. If we have to pay an unskilled worker $35,000 a year, lets make them worth $35,000 per year by giving them the equipment that allows them to perform a skilled task with minimal training.

Now that leads me to another systemic problem, the ability to attract entry level workers.

In my free time I serve as the Chairman of the Newark Workforce Development Board.   I have an enlightened self interest in doing this work—as a labor intensive business, Unionwear’s growth is limited by our ability to add workers.  I don’t encounter many other manufacturers volunteering in that line of work, which is a shame, because manufacturers will benefit more than anyone by contributing to workforce development programs.

When manufacturers don’t participate, programs do not align with our needs.   Programs are designed by academics and workforce professionals with the best of intentions but who may not fully understand why there is such a mismatch between available jobs and available skills, and whose every attempt to close that gap through incentives falls flat.

We have really tried as many programs as possible. The Department of Labor’s customized training grants and On the Job Training Grants are outstanding.  Some programs, like the ill conceived WOTC program, forced on the states by the Federal Government,  throw money away by allowing bad processes and timing to separate the hiring process from the incentive to hire. Other programs, like the BEIP program, have ended up paying us in worthless IOU’s while threatening to fine us for noncompliant paperwork.

Restrictions on tax credit usage generally make State tax incentives worthless.  And many tax incentive programs, both state and federal, ignore the reality that most small businesses are now LLC’s and S-Corps while the tax incentives are not designed in a way to benefit those corporate structures.

What all this means is that there is a TON of money for training and hiring right here in NJ, and a LOT of it gets left on the table.  It will continue to get left on the table until more of the companies that use these grants and incentives take an active role in designing them.

Here are some of the things we are doing at the Newark WDB and at Unionwear to expand the pool of job applicants:

Our most difficult problem is that factory work is not seen as an attractive option to high school graduates.

We worked with the Dream it. Do it. Foundation to make manufacturing seem cool to middle school students. They sponsored a contest in NJ where students came in and created an online video about how cool manufacturing is, and it resonated in the schools that participated.

We are also working with the Manufacturing Talent Network with an ambassador program—a program to send factory workers into middle schools and bring middle schools into factories for tours.  We selected an ambassador who loves his job and who is on a career path within the business. Will this make a difference? If we work with 20 local factories and each ambassador sees  10 middle schools per year in local areas where high school doesn’t automatically lead to college, in five years we will impact 100,000 students at an age where they are most impressionable.  In ten years we may increase the labor pool needed to replace aging retirees.

At the WDB we are working to implement a work readiness credential that will enable employers to know that an applicant is considered “work ready”—more likely to show up for work, play well with others, and be trainable. This in turn will enable manufacturers to take more risks on unskilled workers.

We are working with Career Connections to constantly improve the state’s recruiting tool to reach unskilled workers who don’t use computers, and enable to them be more aware of job openings.

We meet with sectors experiencing job loss—like the retail sector—and discuss ways to prepare unemployed retail workers for careers in manufacturing.

Entry level workers have only been half the battle. Finding talent with manufacturing experience has been extremely difficult, since most of the experience in the last twenty years has been overseas.

We have made great connections with Rutgers Supply Chain Management School, NJIT, and Essex County College, and have hired full time employees from all three. We lean on professors there to consult for us and give us a steady stream of engaged interns.  We are now working with a mentoring program with Rutgers to help our recent graduates get help from seasoned supply chain and engineering alumna at other Newark corporations.

Being so close to New York is a double-edged sword. We have access to the world here. But talent is super expensive compared to the South and Midwest, and manufacturing talent is especially scarce. Some of our management positions have taken years to fill. We have had luck hiring from the food and corrugated industries, which have always stayed local, and getting management to relocate from South America, which has had a vibrant manufacturing sector during the twenty years our manufacturing sector went into deep decline.

So I encourage everyone here to get involved in their local workforce development boards, talent networks, and other workforce related organizations to give you access to the decision makers who created programs, and also give them steady feedback on why these programs work—or don’t work.

At the end of the day, however, we—at Unionwear—that is, are not banking on suddenly discovering a huge pool of work ready millennials who are eager to work in a factory.

That’s why automation and using technology to eliminate non value added work is so key to our ability to compete with China and other low wage countries. Competing with imports is still one of the biggest challenges manufacturers need to overcome

When I started the business in 1992, Made in China wasn’t a “thing” yet.  Tiananmen square had just happened and growing competition from overseas was not on my radar. Boy was that a shock. By the mid nineties, China had overtaken the US in hat manufacturing.

It took twenty years, but we are back in the business of manufacturing hats and bags for brands.

With a union shop right outside of Manhattan we have close to the highest labor costs in the world for all of our product categories. But that doesn’t mean we can’t compete.

First, there are plenty of people who will pay more for USA made.

For decades, we sold primarily to the government, military, political campaigns, and labor unions because they required that products be made in usa, and there were really no other markets willing to pay a huge premium for goods.

One thing our president did in his campaign was raise awareness of the need to Buy American. There has actually been a surge in demand for our products during that time, and I have to say that the market of businesses who will pay more for American made goods has expanded more now than ever.

Did Trump help?

Or did market forces push us to a tipping point?

In the last 20 years China’s One child policy led to a shrinking supply of factory workers, and those who reach working age don’t want to make iPhones, they want to work for Apple.

In the last 10 years a growing middle class in asia has led to inflation and wage inflation

In the last 5 years there has been a global expansion of worker rights and monitoring

The result has been that prices of imported textiles have grown 25% per year for the last four years while domestic goods have remained flat.

As the premium paid for Made in USA shrinks, more markets implement and enforce labor and sourcing standards, and the benefits of Made in USA increase in value.

A lot more people will buy Made in USA when it is 25% more expensive than when it was 200% more expensive.

There are four different standards business use to justify domestic purchasing:

They can have Buy American standards—whether there are laws requiring them to , they want consistent messaging, or they have economic reasons like small batches with quick turns.

They can have social compliance standards that are so high, like many college bookstores, that only domestic shops can satisfy them.

They can have environmental standards, that are much easier to meet when not purchasing products that need to be shpped around the world from countries that are among the world’s biggest polluters.

The can have buy local standards, which we are seeing more and more with municipalities and socially conscious businesses.

A lot of attention has been paid to “buy American” as nationalism… but patriotism does not sell product.

what actually causes buyers to connect with “USA Made” are deep convictions about issues that support of domestic manufacturing can cure…

Issues like localism, worker rights, and environmentalism are much deeper convictions that drive sales.

And consumers are more likely to pay a premium for purchases made with these convictions because the Closer Production is to Consumption, the less acceptable worker exploitation becomes and the more likely goods are produced using labor and environmental standards that the consumer benefits from.

These trends are even bigger in B2b since companies are sensitive to being judged on their commitment to everything from helping rebuild our economy to the working conditions at their vendors’ factories.

Putting a Made in USA label on your product enables a small business to co-brand with the most powerful environmental, socially compliant localist brand in the world!

The second misconception about high labor costs is that a lower price from overseas means an overall lower cost for your product.

There is a concept of Total Cost of Ownership which gives companies a more sophisticated tool to judge domestic vs. import manufacturing. When costs such as Inventory, Lead Times, Product Development Time, Travel, Compliance and Opportunity Cost are taken into account you find that every product has a unit volume where it is less expensive to manufacture that product domestically.

The third myth about high labor costs is that that lower wages mean lower labor costs.

In an Ironic twist we find ourselves constantly being asked to reshore products that designers originally had made in China.

We are almost always able to reengineer these products for a high labor environment by reducing the labor necessary to make these products. In general, we find that the Chinese throw labor at products to save on material—where we may waste material in the same product to save on labor.

A simple example of this can be found in a tote bag. I can always tell when a tote bag is made in China because there is a seam in the bottom of the bag, which would only be done to utilize as much fabric as possible.  An American factory would never add a seam when it’s not necessary.

Lean manufacturing is the most important tool manufacturers have to make high wages less relevant—by trying to eliminate paid time that does not add any value to the product that is being sold.

In our factory, cutting and sewing fabric adds value to the product. Looking for tools, carrying work across floor, rework, and repairing a machine do not add value to a product. Lean is all about doing everything possible to eliminate non value added work.

A typical factory that has had no lean training might spend 20% of their time adding value. A lean factory might spend 60 to 80%.  When done properly, this can cut labor costs by 75%.

That’s how you stay competitive.

If you are involved in manufacturing and you have not explored lean, there is nothing you can do to help your business more than reach out to NJMEP and have them work up a lean transformation program for you.

If I can just send one final message to the manufactures, its that we need to band together and step outside of our factories and help our communities first, so that they can help us survive and thrive.

But first, be aware of the things you think are outside of our control that may one day affect New Jersey’s manufacturers—climate change. Immigration policy. Municipal Pension insolvencies. Autonomous vehicles. Net neutrality.  And educate yourself, your vendors, your clients, and your fellow manufacturers and come up with a plan so you don’t end up in some pathetic New York Times article being quoted about how you never saw it coming.



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