Manufacturing Needs Creativity, Not Hand-Wringing

Lessons in innovation form Eaton Corporation

Success can be confusing, especially in economics. American manufacturing, for example, is reportedly being "dismantled and shipped to other countries." " Outsourcing" was one of the main dirty words of the presidential campaign, which is finally over, and companies are "putting off capital spending and making do with what they've already bought," say some media pundits. Here's a different take on today's domestic industrial world from the top manager of one of the leading manufacturing companies in the United States and the world and from the head of one of our major production machinery groups:

"We continue to be bullish about the U.S. economy." Why? "Consider these facts: We're seeing a 4 percent growth rate in GDP while we are enduring record high oil prices, high metal prices, a Middle East war, worldwide terrorism and a difficult election! This is remarkable. If you look at the numbers also on the jobs issue, they're very encouraging as well."

That's what Alexander M. Cutler, chairman and CEO, Eaton Corporation, Cleveland, told MHM in an interview last month. Cutler had just returned with several members of his management team from China where Eaton now has 11 separate ventures "All for the Chinese market. However, U. S. manufacturers are in good positions today to export as well," he added.

"We have ... integrated more with our supply chains in terms of inventory reduction. ...
We are not in love with automation. We put confidence in our employees."
Alexander M. Cutler, chairman and CEO, Eaton Corporation.

So why all the gloom about America's ability to stay competitive in the global manufacturing arena? "Manufacturing today is very much misunderstood. Think of agriculture over the generations; fewer and fewer people are directly employed in farming, yet production is always setting records. Manufacturing output here is higher than ever. Yet employment in the industry sector continues to decline percentage-wise due to incredible productivity growth," Cutler explained.

In other words, manufacturing in America has been " extraordinarily successful" but amazing productivity growth based upon capital investments in modern technologies ranging from software to the latest in machine tools has meant lower and lower plant-floor employee levels.

What about the companies that point to cheaper product and material imports and job outsourcing as the double whammy that is putting them out of business? "Every time a recession comes, changes in business models are required. We've tried to remain flexible in each new environment over time," Cutler says.

Eaton, in effect, is a changed company from just a few years ago. Some of these changes have to do with acquisitions, Cutler notes, and others are matters of transforming production facilities with automation and innovation.

In May of 2000, Eaton introduced its Eaton Business System, which is a proprietary strategic plan that allowed the company to reduce capital spending as a percent of sales to 4.5 percent from about 6 percent. Yet, absolute capital spending has risen each year since for the $8 billion-plus company. "We have also integrated more with our supply chains in terms of inventory reduction," he adds.

Is the key to all of this to automate? To evacuate the plant? "We've seen many mistakes" over time in terms of companies that invest in fixed and/or variable automation. "We are not in love with automation. We put confidence in our employees." At Eaton worldwide that's some 55,000 people.

Cutler points to his company's leadership in various technologies in fluid power for industry, mobile and aircraft markets, electrical systems and components and automotive engine air management, powertrain and drive train systems and their state-of-the-art technologies that keep the company growing and profitable.

A few years ago, Eaton was managed as "a holding company of loosely confederated businesses. We run it today as an integrated operating company." Eaton was a traditional automotive supplier outfit. Today it's a diversified industrial and, as Cutler points out, is more involved in products that — while often still in the power management, aerospace and automotive markets — now contain significantly "higher intellectual property content." That in turn leads to higher margins, he adds.

Eaton's management team as well as many other manufacturing managers believe we are in the still-early stages of a major industrial recovery in North America. Low inflation, inplace top-notch technology on the plant floor as well as high-tech improvements both to production processes and products may mean ever-smaller percentages of us will work in factories, but output will continue to increase along with quality.

Also a few weeks ago, the bellwether machine tool industry chimed in with some of its most optimistic numbers in several years. Machine tool consumption, one of the clearest measures of a manufacturing economy's robustness, was up to its highest level in four years, with almost $390 million in new machines purchased by domestic producers in September of this year. That's up almost 90 percent from August and 75 percent from a year ago. These September figures mean 2004 was already ahead of 2003 by about 42 percent.

"Manufacturing in the U.S. continues to show signs of a strong comeback," said Ralph J. Nappi, president of the American Machine Tool Distributors Association (AMTDA). "Machine tool orders hit their highest level in four years with all regions of the country showing growth."

Manufacturing has become a creative game in the world. "Intellectual content" is not provided, however, in any automatic way and success will require ever-higher creative contributions to the production business of the world. Cutler and Nappi, as well as thousands of others in American industry, are offering proof that Americans still know how to play that game very well indeed.

George Weimer,
contributing editor

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