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Costs Rising for Small Business Under the Health Care Act
 
By Jim Truesdell
 
    Much of the new health care law remains unclear.   It is subject to change and delay, and is apparently of dubious benefit in the eyes of many of the people it is targeted to help.   One thing, however,  is becoming increasingly clear.    Businesses both large and small  are seeing their premium costs rise as well as the administrative burdens grow as they wrestle with the law’s provisions.
     In late February the Office of the Chief Actuary at the Centers for Medicare and Medicaid Services issued a report which triggered reactions from many of the business trade associations which have been monitoring the law’s effects on their constituents.
This report, coming from the federal government’s own officials, seemed to confirm what small business advocates have been saying and seeing over the past year.   The report predicted that health care premiums will be rising for eleven million people, particularly focusing on those who work for small businesses.     
     Amanda Austin, Director of Public Policy for the National Federation of Independent Businesses said “It’s officially time to change the name of Obamacare to ‘ The Unaffordable Care Act’.”    
      She said that the report affirmed that 65 per cent of people who work for small business will see premium rate increases tracing back to the law’s community rating requirement.  This provision will compel healthy and low-risk groups to assume some of the cost burden for those carrying bigger risks.   Of course, that is one major goal of the plan as it tries to make insurance available at reasonable costs to those with poor prior health records or who are demographically at higher risk.   This is a scary idea for those who have kept a lid on their claims experience and, indeed, a similar thinking is probably a factor contributing to the lower than expected enrollment rates in the government’s campaign to encourage the young and healthy “invincibles” to sign up for coverage with the federal government exchanges.    Despite a media campaign targeting these people for participation, their sign-up rates are lagging.   One factor could well be that the word is getting around that they will be paying higher premiums to help carry the older and sicker participants who will need a base of premiums paid by the young and healthy to make the numbers work and to keep coverage affordable for all.   They are simply not buying the idea that they should be paying for their elders whom they see as already having the jobs and resources they themselves have not yet attained as they begin their careers.
      I ave talked with many fellow small business people who have submitted their company groups for renewal quotations.   They are frequently being told that a certain per cent is being added to all quotes to accommodate the burdens and complexities of the ACA, and then the market rate increases are added on top of that.    Attention also must be paid to the percentages of premium contributions required of employees.    Those with lower incomes cannot currently pay more than 9.5 per cent of their income for health insurance premiums, thus compelling employers to run a series of tests and provide subsidies to the small number of people who might fall in this category.     Of course, many companies must initially modify their plan benefits to meet the ACA coverage standards.   Some also find themselves taking a hard look at the hours of work requirement that triggers an obligation to provide benefits.    All of this becomes even more difficult to quantify as the Administration changes and pushes back deadlines due to technical breakdowns in their websites, hardship to specific groups with political clout, and what seems somewhat like a strategic decision to push the harsher penalties and deadlines past the Fall congressional elections.
    It’s not just small businesses feeling the effect.   An article in the February 25 Wall Street Journal reported that more than 80 public companies have told their investors that the new healthcare rules were having, or could have, a financial effect on their quarterly earnings.
      Despite the problems, the new program moves inevitably forward, even though signs are that it may not be sustainable over the long haul.     Efforts to reverse or defund the program ran up against a politically unacceptable problem when the public seemed to bristle at the lawmakers in the face of a pending government shutdown.    The President takes every opportunity to insist that the plan will be implemented despite the fervor of opposition, or the fact that its most stringent requirements and most draconic effects may not play out until the current administration is out of office.    So, those concerned with easing its impact on employees, employers,  insurers, health care providers and taxpayers must apparently be content with attempting to identify and modify the program’s most onerous and unworkable features.      Despite the President’s wishes to the contrary, it looks like this will be a focus of the Fall campaigns for the Senate and the House.   The people will have their say!
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Joy to the World: There’s a Lot to Celebrate in Manufacturing and Trade 

By Jason Busch and Lisa Reisman

We’re still catching up with the double holiday editions of various magazines. Two of our personal favorites are The Economist (as indispensible as a winter coat, hat and gloves in Chicago over the past few weeks) and The Spectator, a lesser-known political magazine from across the pond. The Spectator is best described as a cheery, witty, free market and moderately conservative leaning weekly (vs. somber, boring, serious and self-righteous weeklies that dominate both sides of the political rhetoric on this side of the Atlantic).  
The lead editorial in the holiday edition of The Spectator this year, titled “Joy to the World,” reflected on just how good 2013 was for many in the world (despite all the usual pessimism in the news headlines). Consider first the world’s economic output in 2013 as cited in the column: $73.5 trillion (the largest ever). But more important, “never has so much wealth been generated – but more important, never has it been shared more evenly. And thanks not to the edicts of governments, but the co-operation of millions of people through international trade.”
Or consider the social and societal gains among those lowest on the economic spectrum. The United Nations Millennium Development Goals, published in 2000, set out “to halve the number of people living on $1 per day by 2015.” But this number was in fact “reached early.” Also consider how the “UN wanted to halve the number of people without access to drinking water by 2015; this was achieved last year.” 
There are many other reasons to reflect on the good and the progress we’ve made as a people in 2013. But in manufacturing alone, from a domestic United States perspective, there’s also a tremendous amount to be thankful for and excited about as we leap into 2014. Consider:
- The regular front-page interest in re-shoring and the creation of new onshore supply chains (which were previously dismantled) as large and small manufacturers alike learn what it means to drive production on North American soil as a rising practice rather than a novelty.
- The booming growth of the automotive business – production volumes have never been higher – and the rise of US manufacturers putting out world-class products (look no further than Chevy’s line-up from the mundane sedan to the new Corvette for proof of this). We write this as current BMW (purchased in 2010) and Honda (purchased in 2006) owners … but maybe not for long.
- Rising trade transparency and the breaking up (or the start of the break-up) of schemes that benefit the few to the pain and cost of the many, such as the aluminum warehousing scheme that benefited producers, distributors and investment banks at the expense of manufacturers and consumers.
- Management and labor finally seeing eye-to-eye based on logic (e.g., Boeing continuing to build new planes in Seattle following a union vote accepting a new contract). We wish the same could be said of government workers and public sector unions, especially over the pension crisis 
- The commercialization and booming adoption of technology innovation in manufacturing, including the increased use of 3D printers and additive technology for prototype parts (speeding up time to market) and the discussion of new applications of these tools (e.g., the spares and service parts supply chain) 
- A US government that seems to be doing the right thing with trade by generally preserving free markets and open access while making the occasional stand against egregious cases of dumping from China and other regions (i.e., not throwing the free trade baby out with the bathwater) 
Of course there’s much work left to do, from improving Asian factory working conditions to stabilizing the various economic situations in countries such as Spain, Italy, Greece and Argentina – as well as encouraging our own youngsters to treat the world of production with the same reverence as the world of services as they embark on their own careers. 
But as The Spectator so concisely points out, “free trade and free markets have made this the best year ever – and stand to make 2014 better still.”

Jason Busch and Lisa Reisman are Editors at Large. 
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We believe that 2014 will be labeled as the year of compliance focus in manufacturing. This will hold true for companies of all sizes, from the smallest machine shops to the largest global contract manufacturers. But the drive to compliant business processes (e.g., minimizing the use of hazardous substances, reducing waste, etc.) in production as well as in sourcing and supply chain (e.g., conflict minerals compliance, global supplier labor practices, etc.) won’t just come from government regulation and requirements. It will also come from our customers as well.
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Just as with commodity price forecasting, the more you look into the future, the more difficult it is to ground a prediction or forecast in hard data. Yet it is certainly fun to deviate once in a while from the purely quantitative, rational, and objective lens and ask the Magic 8 ball what might becoming down the pike. Below, we feature some of the most fun and debated topics based on our presentation. And drop us a line through Surplus Record if you’d like a copy of the whole presentation.
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A 2014 Manufacturing and Economic Outlook
But despite all of the squabbling and gridlock in DC, the overall economic outlook suggests a glass more than half full, if we take Dr. Strauss’ observations at face value. As for us? We’re not quite as optimistic and see a mild downturn hitting in 2014. But here’s to hoping that our esteemed Fed economist is right.
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Will Banks Become an Irrelevant Lending Source for Small and Medium-Sized Businesses?

By Jason Busch and Lisa Reisman

To quote Dickens, “it was the best of times, it was the worst of times.” This statement is not just applicable to the rich and poor in Victorian England. It is also perfectly appropriate today for the banking and lending worlds, especially as it pertains to small manufacturers and other family-owned businesses.
The lending climate for small business these days is dire. Even though larger investment grade companies can issue bonds yielding only 1-2% – and commercial paper (i.e., short term debt) at 1% or less – smaller businesses with good credit can find it hard to get a loan for even half of their outstanding accounts receivables value at anything close to prime (which has stood at 3.25% for many quarters) working through the traditional bank environment.
There are a number of reasons banks are hesitant to provide debt financing to small businesses at any level. From KYC (know your customer) requirements to more stringent regulatory pressure to underwrite only the most secure of loans, the banking system has become an impediment to the backbone of American business. As a result, what the Financial Times recently described as “shadow banks” are stepping in to fill the void.
In a recent article, the FT reported that “more than a quarter of the loans extended last year to middle-market US companies … were issued by shadow banks that fall outside the realm of traditional finance …The rise of these non-bank lenders, such as hedge funds and ‘business development companies,’ means that mainstream banks’ share of lending to the middle-market … has fallen to its lowest in six years.” The situation in the UK is not much better. Last fall, the FT reported that the Royal Bank of Scotland, formerly the world’s largest bank, turned away three out of four small businesses that approached it for loans in recent years.
On both sides of the pond, there is a new storm brewing that is likely going to make banks even less relevant for small and medium-sized business lending, at least in a traditional sense. There is a rise in popularity of newer types of trade financing models (receivables financing and payables financing), including what have become known as “dynamic discounting” solutions that leverage a larger corporation’s balance sheet combined with ERP, accounts payable, and electronic invoicing software to finance early payment effectively on a sliding scale (at effective APRs usually between 18-36%) based on the actual payables date as early in the invoice “maturity” as possible.
 
Other models, which take non-bank capital from hedge funds and other lenders looking for a higher return on short-term assets than commercial paper, treasuries, and other highly secure investments, are also rising in popularity with early adopters. These providers are all looking to reduce risk by financing only “approved invoices” net of dilutions to reduce non-payment and fraud risk. Such an approach requires working closely with a buyer’s ERP and financials system to gain access to approved payables information. Of course the traditional market for what is known as factoring (i.e., when a supplier sells their receivables to a shadow lender on either a recourse or non-recourse basis) remains as well, but the costs of relying on this type of lending stay high for businesses. Other types of alternative lending sources include the rise of auction-based models (often in a peer-to-peer manner) as well.
As business owners ourselves, we find it fascinating to watch the Invisible Hand and technology innovation come together to create alternative lending options for small and medium-sized businesses – and profit potential for new classes of lenders. Of course, if the current administration in Washington were committed to seeing economic growth come from the entrepreneurial sector in the economy without adding risk in the banking sector, they would provide significant tax incentives, as the UK does, for investment in small business (e.g., allowing any investor to deduct a percentage of their investment from current year taxes) beyond just existing incentives such as EXIM for exports and the SBA for small business loans.

Regardless, the concept of going to a bank as the primary source of growth and working capital for smaller organizations may very well become the exception rather than the norm.
 
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Helping the Minimum Wage Worker

By  Jim Truesdell

It is hard not to empathize with minimum wage workers calling for large increases in the statutory levels of compensation affecting those in the fast food and other industries.

Surely it is not easily possible to support oneself, even less so a family, on an hourly rate of less than $9.00.    Would that we could wave a magic wand and by legislative fiat eliminate the market forces which dictate that unskilled jobs are worth only so much.

How much better to reward those who are working in these front line jobs than to allocate more and more to benefits for the non-working so that there is little incentive to return to the workplace and take the first reasonable job available!

The process of identifying moral actions by the motives and intentions of the actor is called ‘Deontology”.     Under this concept it is entirely possible for two diametrically opposed actions to be judged to be moral and ethical if the intent of the actor is altruistic and unselfish.   Thus, a person could be judged to be quite moral by strongly advocating a drastic increase in the minimum wage on the supposition that he or she believes immediate relief of the worker’s privation is the correct way to respond.   At the same time one could be said to be acting morally by standing firm against such an increase because of a belief that implementing such a hike will only lead to higher prices which will collapse the market for the goods (in this case fast food) and result in fewer jobs available at the new high hourly rate.   Recognizing the validity of these varying viewpoints can cast each side in a positive light rather than characterizing those who oppose the increase as hard-hearted while seeing the proponents of the increase as foolish short-term fix advocates who will destroy the very worker base for whom they purport to advocate.

One of the arguments brought forth to support a wage increase is that we need to provide a group of consumers able to purchase the product.  Increasing dollars in the hands of middle and lower class people is a sure way to do that.   This follows Henry Ford’s original model of paying wages high enough for his assembly line workers to afford a Model T.    This presupposes that the goods of a service economy such as this country has become have the same appeal for people’s limited resources to drive purchasing.

Another concern advanced is that minimum wage jobs are disproportionately allocated to the lower earners who rely on such jobs to meet their basic needs.   But perhaps this is not so much the case.    Perhaps the relief of a higher minimum wage is not necessarily targeted at this group.    Could it be that a substantial portion of fast food workers (and those leading the pubic protests) are students, second income earners and children of middle class people who have no intention of making a career of these entry level jobs?    If such is the case then the effect of raising the minimum wage becomes a wealth transfer from poorer consumers who will have to pay higher prices to the more privileged people who are merely supplementing their family’s lifestyle with extra income.    A remedy proposed to this is a strengthening of the earned income credit program which delivers benefits to the “working poor”.   It does that without subsidizing those who are only temporarily part of the low-wage service economy and  does not unfairly target specific industries which are already operating on low margins and which will have no choice but to pass the higher costs directly along to customers, thus creating a downward spiral of business which will hurt everyone in the end.

Right now our biggest need seems clearly to be a growth in available jobs.   The worst way to accomplish this is to provide disincentives to employers to hire more people.   In fact, raising the minimum wage will only provide incentives to develop automation and more efficient procedures for handling what up to now have been tasks performed by people.

The problem which holds down prices which can support higher wages and more hiring is the lack of demand brought about by slow growth.  It is a stalling economic recovery, expansion of entitlement programs which increase expenses without providing more productivity, and inefficient educational systems which fail to provide students with the skills needed to move on beyond the first entry-level low-wage jobs they encounter.

Yes, there is a need to provide a better living wage to workers at the bottom of the system.  It should, however, be under a system tied to productivity of both the individual workers and the enterprises themselves.   Coming up with such a formula rather than a flat hourly rate increase would surely be worthy of a creative political leader.    I believe both the country and business would be waiting to embrace such a plan.
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     As our President leads the country further and further into a society of entitlement and pares back rewards for achievement it is well to consider what has always been the hallmark of successful nations.    It is competitiveness—a citizenry that is motivated to come out on top in every endeavor.    This means a people who are willing to take risks in the hope of substantial reward.   It means an education system that recognizes achievement and prods those lagging behind to step up their pace.   
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This whole process of changing over to a new “mainframe” system or connecting in the “clouds” with a program can be a time of trial for an enterprise. Recognizing how threatening and disrupting this can be to the average worker, and working to assuage their fears and trepidation, can go a long way towards ensuring that the transition will be successful.
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Don’t Jump to Cut Internal Costs: Focus Externally

With uncertainty in the economy and various forecasters (including economists at different Fed branches) calling for a slight-to-moderate downturn in economic activity in 2014, it might be easy for manufacturers to do what they’ve always done in preparing for lean times: cutting jobs or cutting shifts. But maybe this shouldn’t be the first cost savings move that manufacturers make. A new study completed by Proxima and FTI Consulting sheds some fascinating light on the biggest lever companies have in their savings arsenal: suppliers.

Titled, Corporate Virtualization – A global study of cost externalization and its implications on profitability, the report is based on a survey of over 1,900 global companies’ financial reports. The authors found a surprising trend-line in just three short years: labor costs as a percentage of revenue have declined from 13.6% in 2009 to 12.5% in 2011. And non-labor costs as a percentage of revenue have increased to 69.9% in the same timeframe (up from 66.2%). In other words, companies are spending roughly 70% of all of their costs on non-employee areas – suppliers, materials, etc.
The report provides concrete proof that manufacturers should care more about engaging suppliers to take cost out of all aspects of the supply chain as a first priority rather than looking inwards at labor to cut costs. The authors suggest that “the essential role that suppliers play today increases the need for management of the related external activity, as well as creating more complexity … to drive the full benefit from suppliers, companies must have full oversight of supply operations so that productivity, operational and reputational risk, innovation and intellectual property are all properly maintained.”
Yet “only a relatively small number of businesses have transformed their supplier relationship management models to account for this change,” the authors suggest. Change must come quickly, however. And we believe that there are a number of items that manufacturers can focus on to better align their bottom line efforts with the increasing externalization of cost with suppliers.

As a first step, manufacturers should look at their own cost structures not just in terms of fixed and variable costs internally but should seek to understand how they can pull specific levers to increase variable components through the leverage gained from working more closely with external partners – and how this can work to incentivize an internal workforce as well. This might include, for example, in a manufacturing environment, not using the threat of working with external suppliers to buy components (rather than parts for assembly) to increase leverage in discussions with unions, but rather pitting internal labor efficiencies and focus against external innovation and letting the best option win.

Such an effort might involve challenging employees to find new ways of becoming efficient to improve specific processes (what we sometimes call “the Nucor way” in our office) and pitting these improvements against external options. But just as important in understanding how walls are breaking down in evaluating internal vs. external options is truly investing the time at the most senior levels (often involving business owners) to work to engineer cost out of the supply chain through more effective partnering with suppliers.

CEOs, CFOs and plant managers of small and middle market manufacturers should invest as much time challenging suppliers for ways of delivering innovation and cost reduction as they do their with their own customers and employees to drive top line and operational improvements. The easiest way to gauge the emphasis on such an effort is to measure time invested in engaging the supply chain – at all levels of the business. If suppliers are not taking up more time than customer or internal activities, then company ownership and leadership is not paying close enough attention to the opportunity.

All too often, manufacturers place greater emphasis on selling and production (e.g., quality) than on buying. But if the result of this new study is even just directionally accurate, then it’s time for a major industrial course correction – going up to the very top of the business. 

Jason Busch and Lisa Reisman are Editors at Large
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SURPLUS RECORD, is the leading independent business directory of new and used capital equipment, machine tools, machinery, and industrial equipment, listing over 60,000 industrial assets; including metalworking and fabricating machine tools, chemical and process equipment, cranes, air compressors, pumps, motors, circuit breakers, generators, transformers, turbines, and more. Over 1,000 businesses list with the online SURPLUS RECORD. The directory is updated daily. A Buyers-Sellers bulletin board for buying or selling equipment is also available.