Industrial activity is ‘on fire’ — but manufacturers say they’re still getting squeezed

In 2021, Dayton manufacturers are bustling with activity. Production is swelling, orders are skyrocketing and economic optimism is inching toward its highest level in years.

But the industrial market isn’t out of the woods yet. Rising prices, supply chain challenges and a tightening labor pool remain, and those factors could derail momentum until the market volatility subsides.

That was one of the takeaways from the DBJ’s 2021 Manufacturing and Logistics Virtual Forum, which featured a high-profile panel of business leaders across the region.

Dayton’s industrial sector appears poised for a bull run, and there’s no shortage of ground-moving projects to back it up. Yet in many ways, local manufacturers are still dealing with the same challenges they faced long before the pandemic began.

‘Vertical demand’

For many manufacturers this spring, capital investments were a distant afterthought as pandemic-related slowdowns ravaged order projections and balance sheets.

But it didn’t take long for production to bounce back — and companies that prepared are reaping the benefits.

“The ones that doubled down during the pandemic, trained and added capacity are the ones that are taking market share right now,” said Seth Hummel, owner of IQC – the ISO Professionals, a Dayton-based management consulting firm. “That’s what we’re seeing in the Dayton area.”

It wasn’t an easy task for companies serving the hardest-hit industries. When automotive customers shut their doors in April and May, Phillips Tube Group saw 75% of its orders disappear. For a couple months, the company operated with a skeleton crew. By July, it brought everyone back.

A month later, it launched a hiring spree.

“That’s how quickly the switch turned on for us,” CEO Angela Phillips said. “We were very vertical in terms of demand.”

Fuyao Glass America had a similar story. The auto glass manufacturer scaled back production at its Moraine plant after customers like General Motors and Honda suspended operations. Once Fuyao was able to procure enough PPE for its employees, the factory scaled back up, and new orders rolled in quickly.

“(Even with) the current circumstances, we still made a profit,” president Jeff Liu said.

Skyrocketing demand isn’t unique to the automotive space. The consumer goods sector flourished in 2020 and has continued to outperform in 2021, and that’s a good sign for Dayton’s bulk manufacturers, distributors and logistics operators.

“Manufacturing and logistics around the Dayton airport is really on fire,” said Michael Colbert, Montgomery County Administrator. “Especially with the growth of e-commerce. That is huge, and we’ve been fortunate as a region to really benefit from that.”

But demand alone doesn’t indicate prosperity. Supply chain bottlenecks and an ever-constrained talent pool are placing downward pressure on Dayton’s industrial sector. And as material prices rise, manufacturers face an impossible balancing act: Saving the bottom line without sacrificing momentum.

‘Stuck in a vicious cycle’

Since the start of the pandemic, Mikesell’s Snack Food Co. has felt the weight of inflation. Raw materials are getting more costly. Crop futures keep trending upward. Even the price of cooking oils has doubled.

It’s quite a pickle for Dayton’s oldest potato chip company, president Luke Mapp said. Its biggest customers are grocery vendors like Walmart, Meijer and Kroger — and if they don’t increase retail pricing, Mikesell’s eats the cost.

“If they don’t take any pricing action on the shelf, we unfortunately have to absorb a lot of those price increases coming into us,” Mapp said. “We’ll still probably hit our growth objectives, but it’s certainly going to hit us below the line as far as our operating profit.”

Phillips Tube Group faces pricing pressure, too. The benchmark price for hot-rolled steel doubled in 2020 and reached an all-time high this year, surpassing its 2008 record by more than 30%. As of April 22, the cost is still going up.

“We sit between the OEMs (original equipment manufacturers) and the supply base, so we get squeezed,” Phillips said. “The inflation we’re seeing in terms of pricing across the industry is just unprecedented.”

In areas where pricing is predictable, supply is not. Fuyao regularly sources polyvinyl butyral (PVB), a resin commonly used to manufacture laminated auto glass, but it can’t get enough from its suppliers, Liu said.

Likewise, PPE manufacturers still rely heavily on the international supply chain, Hummel said, but sourcing challenges haven’t subsided. Even when companies procure enough materials to make surgical masks and gowns, they still face a hurdle: The FDA gets the final say on whether to approve their products for medical purposes.

“These (companies) are stuck in a vicious cycle with the FDA,” Hummel said. “They obviously have to come in and approve those organizations to sell PPE to the hospitals … but they’re still six to 12 months away from even getting into these companies to assess them and give them approval.”

The biggest challenge, manufacturers say, is workforce. The skilled labor shortage has been the No. 1 issue for at least eight years running, according to one local survey — and the outlook hasn’t improved.

Phillips Tube Group has a huge backlog of orders, but not enough people. Even with 237 employees, Philips said her staff is working extended hours and dealing with high turnover, despite competitive entry pay.

“Everybody needs people,” said Liu, noting that Fuyao has more than 200 open positions, many of which are entry-level production roles.

Mikesell’s is feeling the burden, too. The company is developing more innovative recruitment strategies, but it’s also seeking opportunities for automation to help soften the labor squeeze.

“It’s a very challenging hiring environment,” Mapp said. “We have been struggling in that area, but we’re finding ways to get through as best as we can.”

‘A new frontier’

Despite supply constraints, pricing pressure and a tight labor pool, avenues for industrial growth are swelling.

Perhaps the best example, Colbert said, is near the Dayton International Airport.

“As of right now at the airport, we have over 4 million square feet of new construction that has turned into 3,500 jobs,” he said. “We’re seeing growth in aerospace, manufacturing, logistics and distribution.”

“It really is a new frontier,” he said, “and I think a big part of it is the fact that we’ve got viable land and space for growth.”

Hummel expects a surge, too. Recently, his company scaled up its marketing efforts, developed infrastructure to generate new business leads and launched a workforce development initiative in partnership with Dayton Public Schools.

“Right now, we’re on pace to double our size in the next eight to 12 months,” he said. “The outlook is fantastic.”

Dayton’s logistics sector should benefit from rising consumption-based tax revenues, which enable Montgomery County to make long-term systemic investments. Most recently, commissioners oversaw the expansion of U.S. 40, which aids truck access for the distribution centers in Vandalia and near the airport.

Now, commissioners are working with the county engineer on a $22 million Third Street Bridge replacement project, Colbert said.

In areas where challenges remain, most manufacturers see a turnaround on the horizon. Lead times for steel have doubled since the start of the year, Phillips said — but her suppliers expect deliveries to normalize by the third quarter of 2021.

And for PPE manufacturers seeking 510(K) clearance for their products, Hummel said he expects the FDA to work through the backlog by the fourth quarter and resume a normal pace by 2022.

There likely isn’t an easy solution for workforce, but Mapp and Phillips said they’re exploring new ways to enhance recruitment and retention. For routine tasks like palletizing and packaging, both companies are investing in automation as well.

Fuyao is exploring new recruitment strategies too, and the company has experienced measured success in attracting employees from other states, Liu said. But in order to retain workers for the long haul, Liu said he’s committed to building a better culture.

“How do you attract people (to) come work for you? You’ve got to have a great culture,” he said. “That’s my goal.”

DBJ