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Supply Chain Companies Eye Economic, Legislative Issues

Nov. 23, 2015
Taxes, health care, and economic issues including overtime pay continue to raise concern as 2015 comes to a close.

Slow economic growth is the overriding concern of business leaders throughout the supply channel, but a host of other issues remain on the back burner and are likely to continue to simmer in the upcoming election year. Health care, tax reform, and proposed changes to overtime rules and regulations are a few issues business owners—and small-business owners, in particular—are watching carefully. For companies of all sizes, finding ways to drive growth in what is likely to continue as a slow-growth economy remains the greatest challenge.

Economist Scott Brown, of Raymond James Financial, predicted a mixed bag of economic growth heading into 2016 when he spoke to manufacturing and distribution leaders from the electronic components channel at the recent Executive Conference of the Electronic Components Industry Association. Brown points to ongoing uncertainty in the global economy coupled with longer term issues here at home—notably, that domestic manufacturing is not the engine of job growth that it once was—as problems going forward. These and other factors combine to create a sentiment of caution among business leaders throughout the channel.

“Companies tend to innovate their way out [of difficult times].”
- Dave Doherty, President, Digi-Key Corp.

Many business leaders at the ECIA event said they were experiencing flat conditions overall, with the exception of the large catalog houses—some of whom predicted near-double-digit growth for the year. Mouser Electronics, for instance, predicts revenue growth of between 9% and 11%. Digi-Key’ Corp.’s Dave Doherty says 2015 has been a challenging year, but that he’s “bullish on 2016” for a variety of reasons (steady design activity, in particular).

“Companies tend to innovate their way out [of difficult times],” says Doherty, who was promoted to president of the Minnesota-based distribution company earlier this year. “There are some strong roads ahead.”

Avnet Electronics Marketing’s Ed Smith agrees that business continues at a sluggish pace, though he notes that Avnet started off strong in 2015, not feeling the effects of the current slowdown until mid-August. A positive book-to-bill ratio in September fueled a solid outlook as the company entered the final quarter of the calendar year.

Smith, who is president of Avnet Electronics Marketing Americas, says much of the good news is driven by returning military and aerospace business. But he cautions that the soft economy continues to bring pressure from customers and suppliers, particularly on pricing and as customers seek further cost reductions across the board. Abundant inventory throughout the channel is also a factor, leaving customers in no rush to order from their distributors or other suppliers.

Military and aerospace, automotive, and wearable electronics sectors continue to perform well for Avnet Electronics Marketing Americas, says business unit President Ed Smith.  

When they are ready, however, Smith says the inventory situation is a boon to companies like Avnet. “We haven’t cut back on inventories,” he elaborates. “If you have the inventory…they buy from you.”

Finally, Smith singles out the automotive industry and the wearable electronics market—both on the consumer and medical side of the equation—as bright spots on the economic horizon.

Small-Business Hurdles

Business leaders are watching a handful of legislative issues carefully as well—despite being skeptical that anything will be done about them.

“I’m just disgruntled with the way the whole Washington situation works,” says Joe Gallagher, president and COO of Gallagher Fluid Seals, a fluid power and motion control distributor based in King of Prussia, Penn. “They can’t get anything done. It is unfortunate,”

Topics—many of which arise annually—include the Estate Tax, which, upon the death of a company’s owner, can take a large financial bite out of a family business, to the extent that the company’s future existence could be threatened. Another issue is the state of health care—specifically the Affordable Care Act and its impact on businesses paying for employee health insurance. These issues are a particular strain on smaller companies.

Keith Nowak is president of MPT Drives in Madison Heights, Mich. It was founded in 1959, and in 2012, Nowak bought the company from his father, Ed. Out of necessity, he says he stays on top of the Estate Tax and related issues.

“You have to really take care of your estate planning so you don’t get slammed so hard with those taxes,” says Nowak. “It is a shame that someone who works their whole life and pays all the money and wants to give it to the family is slammed with these taxes. And it’s causing some people to move out of the country or take up residence in different places for tax shelters. I just think that’s a shame.”

Companies with a succession plan in place can save themselves a lot of trouble and, in the long run, money.

“You’re kind of incentivized to get rid of stuff while you are alive because if you wait until you die, the government is going to get way too much of it then,” Nowak says.

Gallagher Fluid Seals is a family-owned business with newer, younger family members starting to take on larger roles within the company. Gallagher says he has avoided much of the negative impact the Estate Tax can have on businesses.

“We’re going through a transition now from second generation to third generation,” he explains. “We have tried to plan and try to work around some of those issues here… [So] for us it is not a major issue. I think for people who don’t plan properly, though, it can be a major issue.”

Estate Tax legislation has been filed in Washington. In the House of Representatives earlier this year, Congressmen Kevin Brady (R-Texas) and Sanford Bishop (D-Georgia) introduced the Death Tax Repeal Act. And in the Senate, Sen. John Thune (R-South Dakota) filed similar legislation toward repealing the tax.

Another issue that may come up in Congress is health care, a topic small-business owners in virtually all industries are watching carefully.

Although the Affordable Care Act, also known as Obamacare, has not been in place for that long, there is some dissatisfaction.

“The bigger issue that we struggle with over the last couple of years is the change in the health care plans,” Gallagher explains. “We renew every year, and it is a different plan—not the same as last year. And that makes it challenging in terms of trying to find health care plans that are competitive for our people and that are good plans. So when they go to their doctor, the co-pays are not too high. That has been a bigger challenge over the last couple of years.”

Business owners such as Nowak are perplexed that their rates have not decreased but have been rising annually.

“I just got my quotes in for the next year and they didn’t go down,” he says. “Somebody told me that with the current president, with Obamacare going on, that our rates were going to go down, and we have not seen that. When I talk to other people, [their] deductibles are going up. People’s co-pays are going up and the employee contributions to that health care plan are going up.”

Proponents of the Affordable Care Act point to its long-term goal of a healthier population due to more people having health insurance and better medical care. But in the short-term, annual rates have increased in many cases—although not as much as previously, Nowak acknowledges.

“It’s going to take a while,” he says. “I think in theory that was the right idea, but what we’re hearing is that the problem is not enough young, healthy people are buying insurance…I’m getting hit with another 9% increase for this year. It was 7% or 8% last year. So that’s better than the 30% increases we were getting there for a while. But it is not going down.”

Overtime and the Economy

As 2016 is an election year, it seems unlikely that any Estate Tax or health care changes will occur, business leaders agree. In addition, they say the climate in Washington hardly inspires much public confidence in real change taking place.

It may be just as well that other issues of concern to distributors are those that they, as business owners, are in a position to attack themselves. One concern is the proposed changes to overtime regulations that came from the Department of Labor in mid-2015.

Under the current rules, employers usually don’t pay overtime to salaried employees who earn more than $23,660 a year. The Labor Department’s proposals would raise that salary threshold to $50,440.  

The proposal would also allow for automatic increases—an increase that could be tied to the rate of inflation, although the specifics of that remain uncertain. As of early November, the finalized version of these changes is expected sometime in early 2016.

The Manufacturers Alliance for Productivity and Innovation looked at the overtime proposals in an August analysis by Les Miller, deputy general counsel at MAPI.

“Companies might start planning for the proposed changes by identifying exempt employees who are at salary levels near the projected minimums. For such employees, determinations can be made as to whether it is more cost-effective to increase some employees’ salaries above the exemption threshold where their usual work schedules would otherwise make them eligible for overtime pay…It might also be advisable to consider updating policies and procedures regarding the reporting of hours worked and receipt of authorization to work overtime.”

Gallagher joins with many in the supply chain in voicing his concern about the proposals.

“In my opinion, it could be a nightmare…I don’t think [the government] understands what business owners face every day when it comes to some of these rules and regulations that they put in place,” he says. “It is not something that is black-and-white and pertains to every industry group. That is where you get into trouble, because what may pertain to the electrical industry [for example] doesn’t pertain to industrial distribution.”

While new overtime regulations can potentially wreak havoc on a company’s budget planning, Nowak says he hopes to add talented younger employees to his payroll. MPT Drives has been doing well for the last couple of years, he says, putting him on the lookout for young talent. But the task is easier said than done.

“Now that we’ve been busy and have been busy for some time, I’m looking to hire people, and I don’t see a whole lot of employable people out there,” says Nowak. “For me to hire a salesman, for example, is very difficult because all the [experienced] ones have jobs. [Their companies] are not letting them go. I’m not big enough to steal from my competitors. I don’t have that kind of money. So we are basically forced to hire kids from out of school.”

While Nowak is all for youth, many of the potential hires have other, more expansive career plans.

“A lot of them are all into this fancy world of wanting to be entrepreneurs,” he explained. “I’ve been to community college classes promoting industrial distribution. I’ll talk to kids and ask them about their plans. What do they plan to do? And I hear ‘I’m going to be an entrepreneur.’”

He said he agrees that the days of someone joining a company and devoting 20 or so years to that one employer are gone. Switching jobs every few years was frowned upon not that long ago. Not anymore.

“And most of us in this industry were those kinds of people,” concludes Nowak. “A lot of the new ones coming in are not.”

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