Investing now to gain edge later

Yeager Machine has been battered by the recession like most small manufacturers in Minnesota, but owner Mike Yeager decided to start spending during the economic downturn.

Early this year, Yeager said, sales started to slide "fast and deep" for his business that makes parts for medical equipment and other manufacturers.

Revenue at his plant in Norwood Young America is down 25 percent, but he recently bought three pieces of equipment at bargain prices for roughly $400,000.

"Companies are really having to be more reactive, limber and able to move quickly" because their customers allowed inventories to dwindle, so they want parts quickly when their new orders start to ramp up, Yeager said. With his new high-tech equipment, he hopes he's gained a competitive edge.

Many small manufacturers, including those owned by families over generations, are looking beyond short-term financial pain when making business decisions during the worst recession since World War II.

Bob Kill, CEO of the nonprofit Enterprise Minnesota that works with small manufacturers, said his business clients are different than huge publicly traded companies.

Instead of releasing quarterly financial results to shareholders, he said, small manufacturers are more concerned with being viable over the long haul and ensuring they have good relationships with their bankers. "The bank is looking more at the long-term visibility vs. a quarter-by-quarter" performance, Kill said.

Brent Iserman, an executive vice president with Bremer banks, said that Bremer has more than 800 manufacturing clients in Minnesota and it has offered a "consultative approach" to help manufacturers through the downturn. That ranges from advising manufacturers on everything from health insurance coverage for workers to arranging loans for those who are expanding.

But as a group, he said, many small manufacturers are simply "looking to reduce expenses in the short term." At midyear, he said, Bremer's manufacturing customers in the Twin Cities area typically have drawn down more than 40 percent on their revolving lines of credit. "Today, we are seeing less than 30 percent" of usage on lines of credit, he said, correlating that trend to lower revenue throughout the industry.

However, he said, in recent weeks "we are optimistic that we are starting to see some lift" toward a sales recovery.

Kill has been encouraging small manufacturers to think about life beyond the gloomy sales figures.

"During really good times, companies often times think about investing in process and people improvements," Kill said. "But they oftentimes will convince themselves that they don't have enough time."

Since the recession has forced small manufacturers to take stock of their futures, Kill said he's seen companies spending money to strengthen their operations in ways that will allow them to reap financial benefits when the recovery arrives.

They are training employees that remain. They are reaching out to big companies to highlight the benefits of having parts suppliers nearby vs. overseas. They are devoting time and resources to earn certification from the International Organization for Standardization, which is a seal of approval for high-quality work.

Most small manufacturers have "pretty much hit bottom," said Dave Fiedler, president of the Minnesota Precision Manufacturing Association. At his own company, Checker Machine in New Hope that makes parts for a variety of manufacturers, Fiedler said that he's seen a "very gradual" boost in orders. While optimism has increased in the manufacturing sector, he said that many company owners anticipate a long road back before they experience robust sales growth.

In Fergus Falls, Dick Young, president of metal fabricator Innova, doesn't expect to make any money this year. He's cut his workforce from 72 to 45 employees. His revenue reached about $10 million in 2008, but this year his sales are down between 40 and 50 percent.

"We can be down in the mouth about this, or we can look at it and say we had a lot of great years in between and then get ourselves positioned here to ride this out," Young said.

"Around the first of the year, everything started to kind of fizzle down," he said. Innova was welding boilers for a company when the orders were suddenly halted.

Two of its big customers, Bobcat and Case New Holland, pulled back on the work they wanted Innova to do.

Innova makes attachments that can be placed on Bobcat loader machines, which are used to move material in construction zones, logging operations and other work sites. Innova also manufactures parts for some of Case New Holland's large industrial loaders.

Before the recession slammed his company, Young said, "We were just going like crazy trying to keep up here. So training fell by the wayside."

He's rectifying that problem this year.

For plant workers, he said he brought in an instructor to teach "mathematics that you'd use on the production floor." They also got some specialized welding training as well as guidance with blueprint reading and measuring techniques.

His human resources director is enrolled in a course that will allow him to train workers on-site on job methods and relations.

Also, several Innova employees, including the plant production manager and crew leaders, recently got problem-solving training from a veteran Toyota manager who taught them Toyota's famed quality principles.

Learning to communicate

Jeff Scholten, general manager of Water Heater Innovations in Eagan, also is an advocate of training, including nontechnical skills. "Most conflicts that you have in an organization you have as a result of poor communication," he said.

Employees at his company recently completed training in "styles of communication," and Scholten said he believes that "when we come out of the recession we'll be stronger for it."

At his plant, Scholten's employees make water heaters that sell for $600 to $1,000, and he has more than 300 rural electric cooperative customers across the United States. The co-ops sell the heaters to residential customers.

"When you have a highly energy-efficient product, they get behind it and promote it," he said. Sales for the water heaters skyrocketed by 40 percent in 2008, but Scholten said his revenue is down about 5 to 10 percent through this summer.

Still he's optimistic that the company will expand sales next year.

Water Heater Innovations, which has 52 employees and five temporary workers, purchased several pieces of equipment this year with a total pricetag in the six-figure range. Although it's a small manufacturer in Minnesota, it didn't have any trouble lining up the money for the equipment purchases because it is part of the large Rheem family of companies. Rheem is based in Atlanta and owned by a Japanese firm.

While sales are down at Yeager Machine this year, Mike Yeager said, "Banks are still willing to [lend] for capital purchases." He got financing from U.S. Bank and a machine tool finance group on the East Coast to buy automated inspection equipment and two horizontal machining centers, which should increase speed and accuracy at the plant Yeager built last year about 40 miles southwest of Minneapolis.

Yeager, who learned about machine tool technology from his father at a vocational technical school in Granite Falls, is counting on a turnaround.

Yeager Machine, which made $2 million worth of parts last year for more than 20 companies such as industrial pump manufacturers, is using only 60 percent of the 24,000-square-foot facility.

"No matter how long the recession lasts," he said, he plans to be agile in attracting customers and filling their orders as quickly and cost-effectively as possible. In a tough economy, Yeager said, "That is probably the key right now to having any success."

Liz Fedor • 612-673-7709