Half Full or Half Empty?
On the face of it, engineers pursuing business in the industrial market today should be seeing plenty of half-full glasses. According to a July National Assn. of Manufacturers (NAM)/ Fortune Magazine survey, 86% of large manufacturers and 82% of smaller ones describe their outlook as positive. NAM's chief economist, David Huether, sees a manufacturing recovery continuing until at least mid-2006.
Other economists are equally optimistic regarding U.S manufacturing. Productivity is up, and the need for new production capacity is growing, they say.
"It's one of the stronger [construction] markets," says Jim Haughey, director of economics at Reed Business Information, CSE's parent company. "The operating rate of factories is up to 80%—that's usually the threshold when stronger capacity spending kicks in. Factory production is up 4% this year, and exports are rising faster than domestic demand."
Despite all the positive economic news, however, many engineers practicing in this sector have yet to see a corresponding uptick in business. Manufacturing productivity rates are increasing at around 5% annually at existing facilities, so companies are getting by without expanding. These businesses are saving cash, not spending it, trying to minimize margins to maintain their competitiveness in the face of Asia's new rising sun, China.
"There's not a whole lot going on," says Clift Montague, AIA, president of Detroit-based Kahn Global Services, a subsidiary of Albert Kahn Assocs., that includes industrial engineering and construction-management services. "It's a tough market from the A/E's side. They're being treated more like a commodity—it's all coming down to cost. Everyone's scared of China, so everyone is squeezing," he says.
In many industries, experts say, manufacturing companies are actually doing pretty well. Like professional services firms in the 1990s, manufacturers have been driving profits out of increased productivity. That's why these companies' financials are improving, while employment rates aren't rising faster—sales growth simply isn't keeping pace with increased production.
"Productivity is rising at the 5% per year pace," says Haughey. "So, unless your company's sales are rising 5% per year, you're laying people off."
Manufacturing construction peaked in 1998, and since then, has fallen to half its former level, according to Haughey. So, even though market spending is up approximately 50% this year, according to Yorgos Papatheodorou, manager of strategic and market development for Spartanburg, S.C.-based CH2M Hill Lockwood Greene, this significant rise doesn't mean a building boom is occurring.
However, cautious optimism is beginning to reappear among those who see all this productivity growth beginning to put a strain on existing facilities.
"The industrial side of the economy has finally picked up enough to justify capital spending," Papatheodorou says. "The need is there because there's been growth in industrial productivity that has made capacity utilization increase."
Some of the bright spots, he points out, include chemical producers, food and beverage producers, construction-equipment makers and industrial-machinery companies. Ironically, China has become an important market for industrial-equipment makers, bolstered by its government's heavy investment in raising its own industrial productivity rates.
On the other side of the coin, once booming semiconductor companies are now facing something of a worldwide glut, and capacity utilization has been dropping in their sector, according to Papatheodorou. And while U.S. automakers are seeing capacity utilization running 4.5% above average lately, Papatheodorou believes this is due largely to margin-cutting price incentives, which hit plant-construction budgets hard.
"Will they be building new plants? Not likely," he says. "Whatever building that's going to happen will be selective."
Reuse, not new use
Experts say much of the industrial work now going on is in existing manufacturing facilities, where company managers are looking at ways to force even more productivity out of current plants. Companies that have grown by acquiring others may want to consolidate multiple factories, while others may want input into ways they could reconfigure or add on to a plant, without having to completely rebuild. Those in the field say this frugality is the result of competition's increasingly global nature.
"Increasing capacity, in general, is important when the economy is growing," says Papatheodorou. "But given the fact that there is competition all over the world, increasing capacity is not the biggest thing. There's always been competition, but it seems to be getting heavier every year."
While it may have tightened purse strings, though, this increased competition has created at least one benefit for engineers involved in industrial design and construction. With more players in each market, manufacturers now must update or completely redesign their products much more frequently.
To address this need, these companies are seeking engineering guidance to find new ways for their existing plants to respond to product changes.
"The appetite of the consumer is such that companies are forced to roll over their products more," says Michael F. Ryan, vice president of business development for Detroit-based Ghafari. "The manufacturers are trying to get more flexibility in place to minimize their investment as they shorten their product cycles."
"Flexibility" can mean many things, depending on the client's market and business model, Papatheodorou adds. He notes three major qualities clients may be looking for when they say they are seeking a more flexible facility:
Incorporating multiple manufacturing lines under one roof.
Creating the ability to change the same line around very quickly as products and product features change.
Being able to adaptively reuse a facility for a significantly different purpose.
According to Papatheodorou, this drive for flexibility is a big issue in foods, beverages and consumer goods, and it's becoming a much bigger issue in pharmaceuticals. "All this requires very thoughtful design and construction," he says, as well as close attention to how processes are designed.
This need to more directly accommodate process needs—both now and in the future—means mechanical and electrical engineers are often working more closely with their industrial engineering counterparts. "Every single job now, we have an industrial engineer on board," says Jim Gikas, a managing principal at Vanderweil Engineers' Boston headquarters. "They kind of defragment the facility and put the blocks where they need to be."
The focus for all these projects, he says, is, "efficiency, efficiency, efficiency."
But, Gikas adds, this need for detailed analysis hasn't meant more time for the design process. If anything, he says, turnaround times have only gotten shorter as manufacturers seek to ensure they don't fall behind competitors.
"The projects we're doing [all] seem to be ultra fast track," he says. "Every job now needs to be done yesterday." This hastened project schedule means construction managers are being brought in earlier than may have been the case in the past, Gikas says, which provides his firm an added resource when determining the cost effectiveness of various design options—an important concern, he adds, because pre-purchase specifications are becoming essential for long-lead items, to ensure late delivery doesn't hold up construction.
Small is beautiful
One segment of the industrial market—smaller manufacturers—is a notable exception for both economists and engineers. While the July NAM/ Fortune survey forecasts a 0.5% employment decline among large industrial players over the coming year, employment is expected to grow a modest, but still positive, 1.6% among those companies with fewer than 1,000 workers. More importantly, small manufacturers are anticipating raising their products' prices more rapidly than larger companies.
"Our big customers are all analyzing their overcapacity—they're looking at how to decommission places," says Montague.
His company is heavily involved in the automotive industry, where falling demand for domestically made products has recently forced margin-cutting price incentives. Smaller companies, though, are showing up as a bigger potential market.
"They're finding that, with four or five machine shops around town, they're looking to consolidate and step up to the next level of operation," he says. We're trying to search out those markets with more of a master-architect approach. It's a very different approach."
Though his firm needs to land a number of these projects to match the price tag of a single, larger commission, Montague says that the added impact Kahn can have on a smaller company's bottom line can provide some less-tangible incentives.
"It feels a little more rewarding—you can actually help their business," he says.
Kahn is now working to develop a model for smaller players who are looking to expand by combining multiple administrative and manufacturing facilities under a single roof. Current and potential customers include smaller automotive suppliers as well as makers of various architectural products. The goal, Montague said, is to help these companies search out new efficiencies and, in many cases, expand their markets beyond their existing automotive customers.
One challenge with some smaller companies, he says, is to keep in mind potential resale needs in any facility planning. Where larger companies think long-term with new plant construction, smaller manufacturers are often concerned about the marketability of a property at some point down the road. Additionally, larger companies tend to own their plants outright, where a smaller company may only be leasing an existing or planned facility, Montague notes.
RFID still just outside the radar
Radio-frequency identification (RFID) is making inroads among those manufacturers most interested in tracking—and minimizing —parts inventories, but technical hurdles remain challenging, engineers working with the technology say. Automakers currently are among the leading users, says Montague, as they seek to maximize just-in-time manufacturing savings by minimizing inventory costs. With RFID, manufacturers know where every single part is within their assembly process, resulting in some very aggressive payment policies toward their suppliers.
"You're even getting where suppliers can't bill until the part is installed," he says, noting that this practice began in Brazilian assembly plants. "They were trying to shift the cost of storing inventory to their suppliers."
But, with all the advantages RFID devices offer manufacturers, the systems' dependence on radio signals pose difficulties for designers. Structural building elements and assembly equipment—along with equipment-related electrical signals—all can create system-disrupting interference problems. As a result, planning and design become crucial to operational success.
"There are massive costs with RFID," says Papatheodorou. "It's not going to go away, but there are obstacles, and the obstacles are technical, not just cost. It's turned out to be more complex than anyone thought."
But some say the opportunities it offers for controlling inventories, along with the information attached to individual parts, will make RFID a key consideration in future plant-design efforts.
"I think there's some work to be done to make it foolproof. The cost is coming down, but you still have durability and placement issues," says Ghafari's Ryan, adding that he sees a bright future for the technology going forward. "As the technology matures, it allows you to throw a bigger net around the value stream. As you're capturing data from the beginning, it allows you to begin communications from the start. I think there's going to be a lot of exciting things that are going to happen [with this technology]."
An oily cloud on the horizon
The potential impact of higher energy costs on industrial construction remains a big question in many observers' minds. Currently, manufacturers seem to be holding off on big efficiency-improving projects, including load shedding or other prime power generation projects, and engineers involved in the sector, frankly aren't sure when the tipping point might come.
"We've been pushing really hard to get people to consider cogeneration," says Kahn's Montague. "My personal opinion is that energy costs have not gotten quite high enough in general industrial. We haven't seen it yet."
Others, though, say the time might be getting closer for at least incremental efficiency improvements. Rising expenses on all energy sources are starting to make an impact. Determining an acceptable payback, though, remains a critical part of these decisions.
"It's not just oil, but natural gas has doubled as well, so has coal," notes Papatheodorou. Though changing out large equipment investments is not yet on the table, he says, "You can affect a lot at the margins. Small things can add up fast and you can pay for them quickly."
Making Drawings Smarter
CAD software makers for years described a future in which digital drawings become truly interactive, carrying data regarding parts and processes as well as highly accurate design information. That future may finally have arrived.
Engineers at Detroit-based Ghafari say they recently delivered four projects based on the firm's building information modeling (BIM) methodology, which combines intelligent 3-D building-system data with the added fourth dimension of time. The resulting electronic documentation, company representatives say, enables faster turnaround from building suppliers and interference resolution before buildings begin operating.
"We're taking the model data and that's being passed directly to the steel fabricator," says Robert J. Mauck, AIA, P.E., Ghafari's vice president of advanced technology. "And we're getting their data back directly. On some projects, orders that used to take 12 weeks now take one-third that time."
In addition to speeding up delivery, Ghafari says the new information-rich drawings can mean tighter contractor bids and fewer field changes, because potential interferences or process collisions are eliminated earlier. The firm began the approach with some of its automaker clients. These companies have adopted similar methodologies for their parts- and process-design efforts, and so are familiar with the "lean" concepts and direct data exchange backing up the initiative, Mauck says.
The firm has used its 3-D/4-D BIM on projects involving both new and existing structures. Success in existing "brownfield" projects depends on accurately capturing any available original drawing information along with current conditions data, notes Michael F. Ryan, the firm's vice president of business development.
Pushing the drawing development envelope also requires suppliers capable of working in a 3-D environment, and who are also able to supply digital product information in return, in the required formats and time frames. And, though paper drawings are still produced for the field, Mauck says associated building-team members are beginning to adapt to an increasingly digital environment.
"There is a growing body among the contractors and subcontractors who are willing to step up to it," he says.