Invest your IQ, not your cash: better times call for investing in process improvements, not more capacity.

NOW THAT THE business climate in our industry seems to be improving I'm amazed at how often I find myself in arguments with manufacturing managers. I say something that I think is basic and obvious, yet no matter how I say it the response I draw from otherwise intelligent, dedicated and seasoned manufacturing folk is often anything but relaxed.

What sets off the firestorm? Simply that now is not the time to either hire people or buy lots of additional equipment.

OK, you may say, either my company has not experienced any increase in volume over the past few months or I am just nuts. While I can't completely rule out the possibility of the latter, I can tell you that we have experienced a handsome increase in volume this year. Despite the encouraging trends I firmly believe now is not the time to hire and buy. Here's why.

First, there's the business environment. We all are seeing upbeat signs including backlogs with more substance, longer lead times, and a pace on the shop floor--and throughout the organization--that is significantly more robust than the anemic past year. That said, the baseline had so deteriorated that even after some strong months virtually everyone is operating at levels below 2002 (which was significantly below 2001, which was below the heady go-go years of the late '90s). In short, while things are better it's not quite time to break out the hats and horns in celebration.

Second, competition is still tierce. Regardless of where competition is located--and with all the brokered business that is sometimes difficult to ascertain--overcapacity still exists and many companies are more than a little hungry for orders. Despite increased raw material costs and lengthened lead times, pricing remains low and resistance greets any potential hikes. Margins continue to be hammered by the proverbial cost/price squeeze.

Finally, there's the psychology. We're groggily waking up. Last year at this time just about everyone was operating in serious hunker-down mode. For the past three years survival was the going concern. Headcount and working hours were cut, though not as dramatically as the backlog was shrinking. At most companies the overall pace slowed as people subconsciously tried to make minimal work fill available time. Improvements of the past few months have left us wondering whether it's just an uptick or a true long-term trend. We're just waking up to the idea that maybe, just maybe, the worst is over and that a real, sustainable ramp is underway.

Which is precisely why now is not the time to hire or start spending money to add capacity. Instead, it is the time to focus your talented employees on improving existing processes.

At this point the response that I typically get is along the lines of "You don't understand what goes on in production" or "You don't care for the hard-working staff." Fact is, especially after a string of such bleak years, I, as does every company manager, do very much appreciate the sacrifice our staff has made. Equally, I understand the difficulty of ramping up, especially when staffing is at bare-bone levels. However, I also know that when competition is keen and capacity is abundant then it is imperative to increase productivity. The best way to increase productivity is to improve the collective skills of all employees, to improve processes.

Every manufacturing manager I have ever known has observed that when the shop floor has a lot of work and employees are busy, productivity and throughput go up and scrap and problems go down. It appears the industry is up approximately 25-30% over last year, a very good increase yet manageable. It can be handled by existing staff and equipment. More importantly, it is significant enough to enable employees and supervisors to tackle process improvements that will enable further growth. Typical projects might include creative ways to relieve bottleneck equipment, eliminating (or at least delaying) the need to buy more equipment.

My experience has been that, especially during ramps, employees who are on the shop floor have outstanding suggestions on ways to improve workflows and throughput. In the late '90s, many companies dealt with the inability to find qualified employees by deploying their staff in project teams to increase quality and productivity. In today's hyper-competitive world that "can do" attitude and management's support and confidence in their employees are even more crucial. Wake up your staff by asking them--engaging them--to improve their company.

Before hiring additional workers, focus on ensuring that all processes have been looked at and improved and helping all employees readjust to an environment of greater volume and throughput. This may also include using overtime--something many employees have not experienced in years--to fill the needed capacity so as to satisfy increasing customer demand. I, for one, have no problem using overtime, especially if it also benefits loyal employees who have financially sacrificed over the past few years. What will occur is that the entire pace of all employees will ramp with the business until the existing staff performs at the pre-downturn pace.

I am not saying that employees haven't worked hard. However, compared with a couple years ago the pace is still way off and everyone--from senior management to the rank-and-file employee--needs to readjust to a higher activity level. Our industry is coming back. It's how we come back that will determine our long-term vitality.

PETER BIGELOW is president and CEO of IMI (imipcb.com). He can be reached at [e-mail].