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Controlling
Costs in a High-Cost State
Facing skyrocketing health care, energy costs, state's manufacturers struggle to remain competitive
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Business New Haven
1/6/2003
By: Mimi Houston
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It's not easy doing business in today's tough economic times, and perhaps few know that better than the 40,000 Connecticut residents employed in the manufacturing sector - still one of the state's most important economic powerhouses.
Companies throughout the state, many in greater New Haven, are facing challenges more daunting than ever before. Rising health-care costs, skyrocketing energy bills and a lack of ready-to-go real estate are some of the issues that may make it hard for a CEO or plant owner to get a good night's sleep.
“In the last two years, we personally have seen a 35-percent increase in health-insurance costs,” laments Ken Dugan, owner of Prestige Tool Manufacturing in Milford. “And we get no explanation for these increases.”
Dugan is not alone. The concern is something echoed by Lauren DeLisa, director of the Connecticut Tool & Machine Association at the Connecticut State Technical Extension Program [ConnSTEP], a Rocky Hill organization devoted to assisting the state's manufacturers with any business concerns and needs.
“At the end of our board meetings the members have a roundtable discussion,” she explains. “The No. 1 concern at our last meeting was the cost of health care.”
What can a company owner do to offset the cost? Not a whole lot, DeLisa says.
“I was shocked at the amount of companies that are still paying 80 to 100 percent of their employees' health-care costs,” she says. “One company wanted to know how the others are handling the increase.”
One suggestion was to have employees get onto their spouses' plans, DeLisa says. “Others said they were going to wage freezes, or higher employee contributions. One company actually faced a $30,000 increase and said they were going to discuss it with the whole company to determine how much they would have to increase their sales in order to meet that increase.”
DeLisa says this open communication with employees is a must, especially within this particular industry.
“We're dealing with, for the most part, small companies - family-run businesses,” she explains. “A lot of these employees were hired by the owners' fathers - they've known the current owners since they were babies. They are very loyal employees.”
In part because of this, DeLisa says there is traditionally an open-door policy inside many of the state's manufacturing plants.
Once you learn what's going on in manufacturing today, it is less shocking to see that so many companies are swallowing price increases to keep loyal employees loyal.
Back at Prestige Tool Manufacturing, it is indeed getting harder.
“I've been asked by one of my customers to reduce the price of a part we've been making for them for ten years,” says Dugan. “And I had to reduce the price to remain competitive.”
Still, Dugan says he does the best he can to provide employees with a benefit package.
“We're offering an HMO value plan this year,” says Ken Dugan. “There were some corners cut here and there, but I offer that as my base plan. I still can't pay for employees' families, though. I feel for them,” he asserts, “but there really is nothing I can do about it.”
Paul Philpott, chief marketing officer at HMO ConnectiCare, says some companies can't even offer right now what Dugan is still able to pull together for their employees.
“I absolutely know it's the No. 1 concern for businesses today,” says Philpott of the current health-care cost crisis. “I've done some dis-enrollment surveys of companies that have left us, and I've found that 15 percent of them are dropping health-care coverage entirely.”
Philpott addresses what Dugan has found one of the most frustrating factors in dealing with rising health-insurance costs: the omission entirely of any explanation.
“Well, it's really a combination of things,” he says. “Physicians in hospitals today are practicing defensive medicine due to the increasing threat of litigation.”
Philpott says increased tests ordered during hospital stays are likewise driving costs up. He also blames the government passing off the cost of Medicare and Medicaid to the private sector.
While Philpott assures the situation is not likely to get any better soon, he does offer a few suggestions companies can take to continue offering their employees much-deserved benefits.
“We went to the [state's] Department of Insurance about a year ago and asked for added flexibility in the way we formulate our plans,” Philpott explains. “We have plans now that reduce the cost by 30 percent.”
He says it's possible by asking the private sector to contribute to more of the services they may need.
“Historically, we've paid 100 percent of all hospital costs,” Philpott says. “By getting employees to pay the first $500 as a deductible, you can save as much as 15 percent on your plan. We even have higher deductibles - up to $1,500, but most employers choose the $500 plan.
“The rising costs are really out of our hands. This is really a national problem, though Connecticut's health-care costs are overall the highest in the nation.
“We also have more government mandates in Connecticut,” he explains. “Chiropractic and mental-health benefits, for example, are mandatory here and are not in many other states.”
What's an employer to do? Philpott says the unpopular but often-unavoidable move is to shift more costs to employees. He offers hope to the dimly-lit picture, noting there is an array of supplementary plans being offered that will help employees with the higher cost of deductibles, similar to those seniors are purchasing to help them ease the burden of high prescription costs.
And, speaking of prescriptions: “A lot of the important drugs that do not now have generics will have them in another two to three years - as soon as the patents run out on these drugs.”
Another positive development Philpott notes is the appearance of the formerly prescribed drug Claritin, now available over the counter. He sees this as a growing trend, which will cut out visits to the doctor in order to get such commonly used medications.
While all this news may cheer company owners like Dugan somewhat, there is a move to get involved now on the legislative level.
“We're wondering if we, as an association, can do something about this,” he states, “whether we can get our voice heard. We're trying to arrange a meeting with [Democratic Third District U.S. Rep.] Rosa DeLauro now. Eight or ten of the officers [of the New Haven manufacturers associations] will hopefully sit down with her.”
Dugan, and countless others like him, are anxious to offer employees a brighter picture for the future of their benefits.
While rising costs of health care tops the leader board of concerns for manufacturers today, energy costs for some come in at a close second. Though not the most expensive state in the nation in energy costs, Connecticut is certainly near the top of the list.
“It's been an issue,” asserts Melissa Hurd, manager of marketing and communications at ConnSTEP.
“There are programs to help companies combat utility costs,” she assures. “And the utility companies are part of the solution. They are trying to help you save energy - because it helps them, too. They have funds set aside for this, and they want to show the state that they've saved people money.”
Hurd points to a program ConnSTEP has developed with Northeast Utilities called the “Prime Program.”
“We are into something now called 'lean manufacturing', which increases productivity - it's doing more with less,” she says. “If you make five widgets an hour with a certain amount of energy, we can show you how you can make ten widgets an hour with the same amount of energy. It's about removing waste from your system. Instead of taking ten steps to do something, now it takes you two or three steps.”
“We have six people on staff here that do lean manufacturing, and that can be so helpful to a company. It can really help them free up cash flow.”
Says Alan Campbell, senior program administrator at Northeast Utilities, who works with Hurd on the energy-saving Prime Program, “We've had some customers who were really up against a wall. If our industrial customer base dies, what will happen to us?”
Adds Campbell: “We've been able to help turn them around. We had one business that was a $700 million-a-year company. They're now down to $450 million, but they could have gone under. We've worked with over 60 companies and so far we've only lost two.”
Campbell says the Prime Program has allowed companies that were losing money actually to make a profit.
“We've turned people around in months, not years,” says Campbell. “We have cases on file where if we hadn't stepped in and done this they would not be here today.”
And he says the working atmosphere improves dramatically once he and Hurd have implemented their recommendations.
Both Hurd and Campbell urge businesses struggling with energy issues to contact their utility providers for information on programs provided to help customers meet their needs, or even reorganize their businesses for smarter energy consumption.
One way utility companies can help businesses is by paying incentives for buying the most energy-efficient equipment when it comes time to replace old machines or add new ones.
“The trick on that is to talk to us before you buy,” warns Campbell. “Remember, the word is 'incentive.'”
And while such steps may help manufacturers with their energy bills, no incentives yet devised can help them with their land needs. The lament industrial real estate agents hear all around New Haven? “I need sites.”
While the cost of real estate in the area may be high, that's not really the principal issue facing manufacturers today who want to move into the area or expand their current operations and stay in the area.
“The cost of the acquisition of land is not worse here than anywhere else,” says Burt Sacco, chairman of TPA Design Group in New Haven, a company that completes all the necessary steps to make any site ready for a new building. “The difficulty is in cleaning it up. While it takes X amount of dollars to buy the land, it takes three times that amount at least to clean it up.”
Robert Santy, president of the Regional Growth Partnership, agrees.
“I don't know that it is more expensive,” he says of Connecticut's industrial real estate market. “It's just less available. We're more densely populated than any other area of the country.
Sacco, Santy and a host of others including members of the Regional Growth Partnership, are pushing the state toward a direction called Smart Growth. The idea is to grow the state in areas where that make the most sense, but can also be quite costly and therefore not a popular choice.
However, they say, if these choices are not made, New Haven and surrounding towns will be building a figurative wall around themselves that closes them off from the economy of the future.
“We want to build where the infrastructure is already in place. Where services like water, utilities, transportation already exist,” Santy explains.
The problem is that many vacant sites are brownfields, requiring hundreds of thousands of dollars of remediation work that as of yet, isn't coming from anywhere.
“There is a whole social aspect to this as well,” says Sacco. “Where are these sites? In the toughest neighborhoods in New Haven. But that's also where the jobs are needed.”
“Bridgeport has done this with great success,” he continues. “They've cleaned the brownfields and put up new buildings. And they've done it without the need to create more parking lots because the people now working there are already in the neighborhood.
“The pieces fit together very nicely,” he says, “but the government resources aren't available.”
Sacco says it's a matter now of just getting the right people to understand, and that previous examples speak for themselves of the need for more land.
“Every time a private or public agency has made land available, it is filled,” he says, “like the Middletown Avenue Industrial Park and the Quinnipiac River Industrial Park. But look around New Haven today and how many cranes do you see? None. We haven't got the sites ready.”
Sacco says New Haven had the right idea back in the 1950s with the old urban renewal program, and wants to see a movement like it in the city today. If brownfields are not developed within the city to house manufacturing needs, he sites another issue the state will have to face.
“There is tremendous pressure by other states to steal businesses away from Connecticut,” he warns. “Especially the machine/tool companies, which represent some of manufacturing's highest paying jobs. There are representatives here all the time from the Louisiana Light & Power Co., looking for whole companies to move - and you should see the offers.”
“We're at a time when we should be remediating,” echoes Santy. “So that we can be ready for the growth of the future. And we need to think differently about manufacturing. We have to place a very high value on it. We are a high-labor-cost state and basic manufacturing will probably not stay here, but there is plenty of work that will stay, and that is manufacturing that uses our highly educated workforce.”
Sacco looks to a bright future if all these concerns are met, and in a timely manner.
“I'm always the optimist,” he asserts. “We have the capability to do great things here in Connecticut, and we know how to get them done.”
“Connecticut needs to make a decision,” echoes Campbell. “To give up on manufacturing would be a sin. We need to treat our manufacturers right.”
Not Dead Yet
Connecticut manufacturers can succeed by honing key skills sets
While the challenges facing manufacturers today are numerous and noteworthy, the industry itself remains a stalwart of Connecticut's economy. And though the face of manufacturing may be changing, its prognosis is by no means terminal.
“Manufacturing in Connecticut is not dead,” says Jerry Clupper, executive director of the New Haven County Manufacturing Association, “it's just different. When you talk about manufacturing, everyone wants to talk about the history of it. But that's really taking the conversation in the wrong direction. We're manufacturing new products - leading products. And the value of what's produced here has gone up.”
Einar Gudjohnsen, CEO of HMP Industries in Ansonia, couldn't consur more with Clupper's view. Indeed, he asserts that the success of his company in today's lean marketplace points directly to the value of his services and products.
“I would say the most important thing in surviving today's economy is selecting good customers,” he states, “companies that operate with good strategies and have a good product. Our strategy has been to focus on fewer rather than many customers. We develop strong, integral relationships with them, and as they grow, we grow.
“We also stay away from risky or highly turbulent markets - like electronics or autos - what we call the 'feast or famine' type of industries. We select industries that are more stable.”
HMP Industries manufactures a broad range of products for its customers, including those used in large electronic systems like monorails and other transportation technologies, mailing and mail-processing systems and highly specialized hand tools.
What separates HMP from other manufacturers in the state, says Gudjohnsen, is the long-term relationship the company forges with its customers. Instead of bidding each time an order for more products comes up, the company works to form more stable and predictable business relationships.
“We look for customers who have the kinds of needs we have the capacity to support and have the same strategies and interests that we do,” explains Gudjohnsen. “Our customers don't change every three months - they generally pledge not to be shopping work around. We have a contract, and we're in business together.”
Another service HMP provides its customers is the tracking and warehousing of products. HMP employees use the Internet to check the supply of and need for their products. Because of this, Gudjohnsen says they save considerable amounts.
“We have customers averaging several million dollars in business with us,” he explains. “We have finely-tuned systems of interaction. The customers e-mail their information to us every day, and we process that and fulfill their inventory needs on a daily basis. It's self-regulating, self-monitoring, and it's replenished on an as-need basis. The amount of work for them is very low. Normally this is managed in purchasing by five to eight people - that is a huge cost.”
Gudjohnsen points to other strategies that have kept HMP Industries afloat in turbulent times as well. He says the company employs a varying number of temporary workers that they train and later hire if the relationship develops well. He also says it is this practice that saves full-time employees. If cuts need to be made, HMP lets the temps go.
Gudjohnsen says another way to beat the business odds in rough times is to find out where your company's greatest strengths are and to utilize them. He says that before HMP Industries established its own successful niche, a lot of corporate soul-searching was done.
“We tried to be the low bidder,” he remembers, “but we just were not good at that. We were not the low-cost provider because we just weren't structured to support that. So we retrenched, refocused and analyzed our culture. We looked at our people, our skills, and we found we had a natural culture that favored servicing very large companies. We are very customer-focused and we build our business relationships focusing on their needs.”
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