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Surplus Record
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The World's Leading Online Marketplace for Used & Pre-Owned Industrial Machinery & Equipment
The World's Leading Online Marketplace for Used & Pre-Owned Industrial Machinery & Equipment

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Celebrating 90 Years of Print and Digital
 
Ever since our first issue, in 1924, Surplus Record has been known to industry as an accurate and reliable source for surplus and used machinery & equipment. My grandfather, Thomas P. Scanlan, had a mission, to create a new kind of magazine devoted strictly to the buying and selling of surplus capital equipment. The first thirty-two page issue, was printed 90 years ago this month, serving an industrial base of 30,000 buyers. Wrote my grandfather, “It is to aid this group and to serve others unfamiliar with the real economy of buying used and surplus equipment that SURPLUS RECORD finds its excuse for existence. It is truly the ‘Industrial Bargain Sheet’.” Since then, thanks to our millions of readers and thousands of advertisers — the Surplus Record has grown and changed.
 
As we listen to you and change with the times, since our 80th anniversary, we have grown in a number of ways:
 
·         Each day, nearly 7,000 people make our web site the leading online source for used capital equipment information.
·         As a result of this growth, more than 1,100 dealers of surplus equipment advertise their inventory for sale in both print and online. As an advertiser remarked last month, "I sold 6 machines from Surplus Record in the last 2 weeks, it's my best source of leads."
·         In the social world, our web site offers daily notices of industrial auctions and special liquidations, as well as daily updates of the new inventory items posted for sale.
·         The Surplus Record mobile apps have been downloaded by 1000’s of users who can easily access the tools for buying and selling equipment from their smart phone.
 
I am convinced the key to our continued success is innovation. The Surplus Record brand is respected and known worldwide, and a trusted source for procuring industrial capital assets. For 90 years, the Surplus Record in print has been about bringing together buyers and sellers in order that both groups feel that they have been properly served.
 
These are considered uncertain times for print. However, I believe that’s more the case for media that doesn’t innovate and provide a utility to its advertisers and readers. SURPLUS RECORD has proven that our vision of offering both sellers and buyers a seamless multichannel service via a print directory and a “search engine” online directory, is as relevant today as it was 90 years ago. I thank you for making Surplus Record industry’s No. 1 vehicle for sourcing used industrial equipment.

Thomas C. Scanlan
Publisher/Editor

Manufacturing in Mexico is Back: Are You Ready?

 By Jason Busch and Lisa Reisman

Despite the negative headlines to come out of Mexico in the past year – illegal border crossings, tragic gang/drug violence, state corruption, etc. – the manufacturing economy in our NAFTA partner country has indeed grown. In fact, during the same twelve-month span, the HSBC Manufacturing PMI for Mexico has shown continuous stability or growth (not a single month of contraction). Moreover, findings from anecdotal discussions with many large industrial companies continue to suggest that Mexico is continuing to benefit from both near-shoring and supply chain localization programs.

Simply put, if you can put an item on a truck and get it to a plant or a DC in a matter of days, there is much greater security and reduced supply chain risk than having to wait for an order from China on the water for weeks. Yet doing business in Mexico is different. Suppliers (and managers even within your own facilities) have different expectations and motivations. Within manufacturing, Mexicans strongly value partnership and relationships -- and need to trust in both their own customers and suppliers. We recently had the chance to sit down with Xavier Olivera, Spend Matters Mexico/LATAM Research Director an expert in regional Mexican supply chain and procurement issues. The full interview appears as part of Spend Matters PRO, a subscription service in August, but we’ve adapted and excerpted some of the more useful tips for Surplus Record readers, below.

One of Xavier’s key pieces of advice is that logistics and supply chain concerns cannot be underestimated for manufacturers. These are truly top of mind, as is inventory optimization and planning. A major reason for this is that within manufacturing in Mexico, especially with small and mid-tier suppliers, working capital remains king. Similarly, exploring the intersection of procurement and supply chain issues and their impact on working capital strategies, especially for non-investment manufacturers, is key (it is important to note that the state of bank and non-bank lending in Latin America is very different from the U.S. and Canada). It can be difficult for manufacturers to obtain credit in Mexico. This is why working capital is so important and balancing inventory needs/flow with cash needs/flow is also critical.

Beyond macro topics like this, appreciating the need for how decisions are made in Mexico is also important – and how one goes about building relationships. As Xavier notes, “We don’t say no, but we don’t say yes” in interactions. One of the keys doing business successfully with manufacturers in the region is understanding how you must sell suppliers and supply chain partners on working with you. Most important of all, if you can develop a value proposition that works for both parties in a collaborative manner, you will be much more successful.

But understanding who is “the boss” remains important. When working with suppliers and manufacturers generally, you have to figure out the power map, and based on that, you have to reach that “power guy”. The guy (and it usually is a guy still, although this is changing slowly) is making the decision. It is important to sell them on the value proposition of working with you directly. Ultimately, few large decisions (on the supply or buy side) are delegated in Latin America. You also need to figure out if the decision will be made in Mexico or somewhere else. This can be hard to discern at first if the organization has significant operations outside of Mexico.

In all dealings with partners, active listening is important. What people say (at first) is not always what they mean. Xavier also observes that, “you need to read between the lines and observe the operation”. Remember above all, business is not done quickly in Mexico. Relationships are developed over time, and while priorities may not change, they are often better understood in the context of “getting to know executives rather than rushing to conduct a transaction or issue a purchase order”.

Consume Less When Asked is Not an Energy Independence Strategy

By Jason Busch and Lisa Reisman

Right as we got to press, the fallout over rising CO2 emmisions standards is hitting our own back yard. A major energy producer in Illinois announced yesterday that it will shutter a major coal-fired generating plant and convert another to natural gas. The organization will terminate 250 employees as a result of the closing and changes. Granted, there are certainly environmental benefits to the move. According to the Chicago Tribune, the elimination of the plants will “will remove 16 million tons of carbon dioxide from the air yearly by 2020 when compared with 2013” which  “is equivalent to what 4 million cars would produce yearly,” among other environmental benefits.

On paper, all of these changes are hard to dispute (aside from the loss of jobs). Yet the bigger picture for energy importation, usage and creation in the US is not as pretty as a front-page news story in a sympathetic publication – nor is it as simple to understand. Indeed, the move to renewable energy sources such as wind and solar – as well as the switchover to natural gas – and the shuttering of capacity at traditional coal and nuclear generation facilities brings with it a host of risks and will force businesses and consumers to change behaviors or pay more – significantly more.

Fundamentally, if new sources of energy had infinite and consistent supply, such a shift away from either “polluting” or “not-in-my-backyard” resources and facilities would not be an issue in a constant state of pricing and consumption. But the double-whammy working against this concept is that not only are energy and power generation needs increasing, they are doing so against a back-drop of rising overall prices. A recent Accenture report suggests that energy prices will “continue their long-term uptrend” and experience inflation. This will follow-on a trend we have seen in recent years of steadily rising oil and gas prices (despite the occasional blip). This is at trend Accenture expects to continue – “the International Energy Agency (IEA) forecasts oil demand will accelerate in 2015 as macroeconomic growth improves,” the firm suggests.

Aside from the question of rising prices, an even more fundamental issue exists. And that is steady-state capacity, a concept we have taken for granted in the past. Accenture notes that “As more renewable energy sources come online, grid power supply becomes more unstable because solar and wind power, unlike traditional gas, coal, or nuclear generation, is intermittent/does not have a constant base load.” Since energy cannot economically be stored on a sunny day when the winds are blowing at 30 MPH and transmitted the next during a damp, cloudy day in which a butterfly and local politicians generate more moving air than the weather, what can be done in this environment?

The answer, according to Accenture, comes in the form of what are called “real-time” demand response and pricing programs. Under these models, “when the electric system experiences very heavy load, electric system operators ask demand response customers to reduce electricity usage.” In times of high capacity generation, companies can even ask businesses customers to consume more. All of this sounds perfectly logical, of course, but coming from two people that have done business globally, such a policy actually sounds like the modern metering equivalent of living and working in the third world where capacity is always a concern that can trigger blackouts without intervention. Two steps forward, even more back.

The numbers make things even more black and white (or should we say “switched on or off”). The US Energy Information Administration recently released a report noting a decline in generation capacity from 2,506 million MWh in 2004 to 2,360 MWh in 2013 “because of a 22-percent reduction in coal power generating capacity,” our research suggests. Moreover, add on top of this the relative costs of coal ($2.39 per million BTU) and natural gas ($4.93 per million BTU) and it becomes painfully clear what the cost of clean energy independence will be.

Just don’t tell Surplus Record to turn off the lights at 4:00 PM when the wind stops blowing!

Jason Busch and Lisa Reisman are Editors at Large.

Reliable and Affordable Energy is Key to Small Business Growth

By James Truesdell

      Where is the balance between environmental concern and reality?     How can we work for cleaner air, water, and soil while still meeting the needs of consumers and businesses for accessible energy?   How can we find an energy independence that will remove us from some of the global strife that we become enmeshed in because of our dependence on foreign oil?
     In my town of St. Louis we recently saw student protests at Washington University decrying the involvement of a particular coal company on campus as part of a group called “The Consortium for Clean Coal Utilization.”   The Consortium was founded by the University in 2008 in partnership with industry dedicated to ensuring that coal can be utilized with minimal impact on the environment.   The protesters seemed to be objecting to the phrase “Clean Coal”, arguing that there is no such thing.   How ironic that efforts to resolve environmental problems should be targeted as something to avoid!   The fact of the matter is that we are not in a position as a society to avoid the use of fossil fuels and, therefore, efforts to make them more compatible with a healthy environment should be praised and not criticized.  
     The same can be said for new methods of securing petroleum fuel.   We see in the paper every date the incredible international tensions brought about by our involvement as an energy partner, consumer and perhaps exploiter of the oil reserves of the Middle East and other areas.   It has propelled us into military involvement and alliances which seem to run counter to our interests in so many ways.   And yet, we have great difficulty in pursuing domestic sources of the fuel here in North America when it comes to pipeline construction, access to government land for mining, and new technology allowing us to more economically secure fuel from within our own borders.   Our pursuit of renewable fuels—wind, solar, energy from waste, and hydropower-- is sometimes characterized by politically appealing grand gestures granting subsidies and incentives for methods which bear little chance of bearing significant fruit—or which are dependent upon intermittent climate and natural conditions which make it hard to rely upon for a consistent fuel source.
     Energy costs are a major part of the operating expenses of small as well as large businesses.   Whether it comes from the costs of operating delivery vehicle fleets, heating or cooling commercial complexes, or powering operating equipment, ready access to reasonably priced power is a necessary part of the equation of a successful business.   These costs have been rising rapidly and they are increasingly unpredictable.   The erratic nature of these costs means that businesses are not able to rapidly adjust selling prices to account for this.   What we see instead sometimes is the imposition of “energy surcharges” to reflect temporary spikes in fuel and delivery costs.
This often reflects what is happening down the whole delivery chain as a manufacturer institutes such a policy, it is then put in place by a wholesaler, and the retailer then tries his best to recapture it from the ultimate consumer.   Sometimes these “surcharges” continue to exist long past the duration of the fuel cost emergency, thus creating an artificial net market price where those with market power are able to beef up their gross profit at the expense of those in the supply chain whose customers will not accept a continuance of such charges absent a clearly present fuel crisis.
   Maintaining a level cost of energy is in everyone’s interest.   Doing so by encouraging domestic sourcing is the most logical approach to making that happen.   Yes, our environment needs protecting, but let us not handcuff those businesses and utilities that have the technological capability, research ability and manpower to find solutions.   We need to:
Proceed with the Keystone Pipeline, addressing fuel costs, reducing reliance on foreign oil and creating economic opportunity.
Set realistic environmental policies that improve efficiency and cleanliness of existing coal (fossil fuel) power plants.
The Environmental Protection Agency should enforce regulations to meet the objectives of the Clean Water Act, the Clean Air Act and other laws to protect the environment, but they should set realistic goals and timetables which take into account existing technologies and consumer needs.
Incentives should be provided for energy sourcing research, but it should be aimed at those with a true chance of realistically effective usage.   It should not create a fantasy market based on illusory costs to encourage forms of energy which are speculative at best.
   For too long we have structured our national fuel policy on the concept of scarcity and conservation.   Now new advances appear to be able to alleviate that situation.   Rather than viewing our energy industries as despoilers of the environment we need to encourage them to develop methods of providing more energy in a more environmentally friendly fashion.   Perhaps it is time for so many in our educational and entertainment communities to stop portraying the energy industry as the equivalent of an earth-destroying evil empire.   That is a simplistic approach which offers no real solutions to our need to co-exist with our planet while meeting human needs.

Will Amazon Change How Manufacturers Purchase in the Future?

By Jason Busch and Lisa Reisman

We spend a lot of time working with larger procurement and supply chain organizations and the software, consulting and distribution partners that serve them. We also have gotten to know a number of potentially disruptive providers that could upset the broader industrial distribution and software applecart when it comes to how small and middle market organizations could change their purchasing and inventory strategies in the future.

Among these new providers, Amazon.com brings the greatest potential to disrupt the status quo for manufacturers buying everything from maintenance, repair and operation (MRO) items to raw and semi-finished materials (e.g., resin, metals, etc.) Amazon’s first foray into the world of industrial distribution, AmazonSupply, appears to be going well from the outside (the company is notoriously press shy), including the number of SKUs now available through the site, which exceeds Grainger.

But the real power of Amazon to disrupt how companies buy will come not just from the business of stocking an increasing number of SKUs relevant for manufacturing, but the potential for meeting delivery windows to meet the needs of just-in-time (JIT) programs. And no, we’re not talking about the Amazon “Drone” vision, but rather the more pragmatic capability of meeting delivery schedule requirements on an hourly basis in major manufacturing markets, providing a last-mile alternative to Grainger and localized distributors.

But Amazon may do more. As we recently wrote on Spend Matters, imagine a world where manufacturers “use future functionality on Amazon to build workflow, process, and controls into the online purchasing environment (and even taps Amazon to manage private semi-private/partitioned catalogs from suppliers) without having to pay an additional licensing fee from a software perspective.”

Put simply, Amazon may deliver capabilities that begin to mirror and extend the buying functionality within MRP systems (including workflow, controls, budgeting, general ledger integration, etc.) on the Amazon website itself, delivering this for free to manufacturers. We believe this scenario is not a question of “if” but “when” and when it becomes reality, will allow manufacturers to more tightly control purchases as well as insure they’re getting a price that meets/beats other alternatives, with the right controls put into place.

Not a believer? Check out Amazon’s recruiting page for AmazonSupply (the best window on the vision we’ve seen): www.amazonsupply.com/careers. And consider how they’re positioning the initiative to potential employees: “Through our entrepreneurial and innovative culture, Amazon has also developed new technologies and products (like our Kindle e-readers and tablets) and enterprise services (like Amazon Web Services). Amazon is now reinventing on behalf of the business customer and focused on building the largest and most innovative Business-to-Business (B2B) marketplace in the world through AmazonSupply.com.”

Of course simply putting the right bodies in place a business does not make. We recently spoke to an expert in the industrial distribution market that uses AmazonSupply as a sales channel at his organization. He told us the experience is transformative and that as part of the supplier experience, Amazon provides a range of tools to help vendors sell more effectively including integrated demand forecasting as well as “Brand webpage development tools [in which] the catalogue and content management system Amazon provides to suppliers is a significant differentiator.” Our colleague also notes that Amazon is offering “a promotions management tool to structure, fund, and track product promotions,” among other merchant tools.

As we observe in Spend Matters, “AmazonSupply is doing something radically different – it’s providing true information transparency to both buyers and sellers. And in doing so, it’s treating industrial suppliers like they’ve never been treated before, behaving as a true ally in helping them grow their business rather than serving as a margin squeezing intermediary.”

That is revolutionary. And we believe it’s just the start. By 2020, we see Amazon disrupting not just the industrial distribution ecosystem, but providing a technology enabled cockpit to help small and middle market companies buy and manage their supply chains like industrial giants.

Jason Busch and Lisa Reisman are Editors at Large.

Overtime Expansion Edict Strikes at Heart of Work Ethic

By Jim Truesdell
 
     President Obama’s latest attempt at fashioning a government rule to alter free market forces goes well beyond perpetuating a fantasy economic comeback.  It undermines the whole idea of someone working hard to “show what they can do” and move ahead in their career.     It is this driving spirit of doing what is necessary to get ahead that has kept American business in the ascendency even as other factors have converged to keep us down.
     Sensing that his party needs an issue in the Fall Mid-Term election to counter widespread dislike of the questionable Affordable Care Act, the President issued directives to his Department of Labor to unilaterally rewrite the rules governing overtime exemptions.   In short, the income level at which overtime must be paid for hours worked in excess of forty per week will rise by some estimations to as high as $50,000 plus.   This is likely to encompass many of those who are fast rising “stars” of businesses who are mastering the intricacies of their enterprises as they seek to impress ownership with their potential for senior management.   These people have traditionally been the engine driving our economy.   They are the hard working elite who drive production, expand markets, bring about innovation and make the day to day “calls” determining the success or failure of a business and, collectively, of our nation’s economy.
     Let’s now suppose that, under new proposed rules, these up and comers will need to be paid time and one-half rate for all those long hours.  One of several things will likely happen as businesses put a lid on overtime expenses:
These people will no longer work those long hours.  If they do they might find themselves criticized (for racking up overtime expense) by the very ownership they have been trying to impress.
They will be held to the same standard of work to be accomplished but will be told that it must be completed within forty hours (good-bye quality workmanship!).
Management will just cut salaries by fifteen to twenty per cent to create reserves from which the overtime can be paid.
The passion and ardor for accomplishment of these managers of the future will dissipate as they feel frustrated at the caps on hours worked and as they increasingly identify with a union style mindset focused more on pay per hour rather than objectives accomplished.
   The President has introduced this concept without the normal procedure of having the Labor Department publish notice and call for a formal comment period.   All the better to use it as a political football in his party’s effort to push the notion of income inequality and class warfare in the election season!   By leaving open the specifics of the regulations to come with respect to income target levels affected, they will be able to appeal to a wide swath of the electorate who might buy into the concept that they could see an increased paycheck without considering the long-term effects on our productivity in this increasingly globally competitive marketplace.
     With the recent campaign to change the minimum wage, with the Affordable Care Act run through Congress without legislators being given a chance to even read the bill, and with enactment and selective enforcement of numerous anti-business rules, it is apparent that the President sees no relation between the creation of a business-friendly environment and progress in the economy.    From all appearances the Administration is proceeding on the theory that they can bring about prosperity by issuing government edicts and that they can create a level economy of all workers regardless of those workers’ talents, efforts, and achievements.    Such an idea has been tried from time to time around the world for centuries, of course, and has not worked.   It has resulted in either failures or a return to free market principles which do work.
    Is there still time to recover?    It begins with the voting this November and the election of a Congress willing to stand up to an Executive branch determined to make an end run around the people’s representatives.   We will see.

Myth Busting: The Death of Steel in Automotive Manufacturing 

By Jason Busch and Lisa Reisman

Popular opinion on certain subjects seems to ebb and flow with the media tides. Years ago, global warming was taken as not a fact, but an imperative, to be prioritized and tackled – not to mention quantified. Now, even Warren Buffet, a left-leaning centrist and investor in renewable energy, recently said on CNBC that global warming is not playing any role in insurance premiums – insurance is one of Buffet’s primary lines of business – and that his own firms have profited from rather tamer than expected weather patterns. 

Regardless of one’s own perspective on global warming, it’s clear that there’s more uncertainty around many topics than the initial headlines and alarm bells would cause one to believe. Within the automotive industry, a topic no less controversial than global warming in environmental, energy and industrial circles, is the future of steel as the cornerstone of automotive platforms and bodies. 

If you read the headlines alone, you’d think steel will soon be as dead as AMC, Packard, DeLorean and hundreds of failed automakers that once used the venerable metal and various alloys. Consider one of the top stories on the new Ford pickup from Car Talk, one of our favorite radio shows (and blogs): “By choosing to build the 2015 F-150 with an all-aluminum body, Ford is shaving 700 pounds from the truck’s weight.”

Car Talk further observes that weight savings “is a critical factor as automakers struggle to reach a 54.5 mpg fleet average by 2025. The F-150 has been America’s favorite vehicle for 32 years, so lightweighting it—and reaching, maybe, 30 mpg on the highway—is really important to Ford.” 

Got that? America’s best selling pick-up truck for 43 years and the top vehicle in sales for 32 years is betting big on aluminum. Case closed (for steel). The future of the legacy metals appears as dead as the bloated steel companies that once overlooked the Monongahela River in Pittsburgh before bankruptcy saved them (or at least some of them).  

Yet don’t jump to conclusions so quickly. Just as the US steel industry rebounded – and Nucor took over as the largest steel producer through decentralized, smaller facilities, innovation and grit – so too might steel have a future in automotive. 

We recently wrote a piece in our publication, MetalMiner, titled “Revenge of High-Strength Steel,” in which we argue that the rumors of steels demise are greatly exaggerated – especially if you measure the projected use of metals correctly. Specifically, “High-strength steels and ultra high-strength steels will necessarily replace the heavier steels used previously. This alone automatically decreases the total steel weight used per vehicle.” 

How much stronger is high-strength steel on a weight adjusted basis? According to an article in Popular Mechanics, a study found that 350 pounds of ultra-high strength steel can replace 650 pounds of traditional automotive steel to meet certain CAFE standards. And it can do so at a price that is less expensive than aluminum – and requires fewer changes to production processes. High strength steels also gives a new lease on life to producers because the margins it provides exceeds that of regular steel.

Granted, aluminum certainly has a number of benefits in its camp as well. But just as the potential and stories surrounding climate change were all one-sided in the initial media coverage and could lead one to believe only one thing (i.e., catastrophic imminent impact), so too have the initial stories involving the death of steel and the rise of aluminum in automotive been more alarmist than predictive. 

As with climate change, the future of steel and aluminum in the automotive industry remains open for continued analysis and interrogation from all perspectives. Yet on one metals topic we have no disagreement in our office: despite the elegance afforded glass, aluminum stores our favorite beverage, beer, just about as good as any container – if not better. 

Jason Busch and Lisa Reisman are Editors-at-Large. 

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!

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.
 


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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