Overcoming the Obstacles: The Costs of Doing Business

By Diane M. Calabrese / Published February 2014

 

C

osts Associated with Regulations, Materials, and Insurance

Adhere. Anticipate. Avoid. When the subject is how to nimbly minimize the costs associated with meeting regulations, procuring raw materials, and reducing risk, the three ‘A’s sum it up well.

Adhere to regulations. The cost of compliance is far less than the expense associated with a fine or legal rebuttal to a citation.

Anticipate fluctuation in the cost of materials necessary to operate a business. Irrespective of the nature of the material—from raw to finished (metal for fabrication to a cardboard box for shipping to a pressure washer part)—prices change. Planning ahead for certain increases keeps budget projections realistic.

Avoid trouble. Secure proper and mandated levels of insurance coverage. Hire competent employees and train employees well.

That’s all easy enough, common-sense stuff. Of course, it’s also a long to-do list on top of selling a product or service in a way that yields a profit. With regulations mounting in the context of the Affordable Care Act and the likelihood of carbon reporting requirements, it is not surprising that many businesses are adding full-time compliance officers to their employee roster.

Dollars directed at compliance are dollars diverted from expansion, innovation, and other profit-driving activities. The actual dollar amounts associated with compliance are staggering. In the United States alone, more than $557 billion will have been spent on compliance in 2013, according to a November 21, 2013, article by Joe Mont in Compliance Week (www.complianceweek.com).

It’s not just private entities evaluating the cost of compliance and demonstrating the burden of its weight. The U.S. Small Business Administration (SBA) offers an 83-page study (“The Impact of Regulatory Costs on Small Firms” by Nicole V. Crain and W. Mark Crain), which its Office of Advocacy released in 2010. (Read the document in PDF format at the SBA.gov website.)

The study data used by Crain and Crain extends only through 2008. A clarification from the National Technical Information Service (NTIS) accompanies the document, advising that the methodology may be both novel (regression analysis, actually, which has been around a long time) and flawed.

The NTIS may want to tamp down readers’ confidence in the results, which are quite eye-catching. Consider just the jump in spending by federal regulatory agencies on regulatory activity. Between 1990 and 2008, such spending increased from $20.9 billion to almost $47.8 billion. At the same time, the number of federal employees assigned to social regulations increased from 119,459 to 215,147. Interestingly, the federal employees assigned to economic regulations did not increase much (33,155 in 1990 and 34,234 in 2008).

The authors of a 2010 study conclude that small manufacturing firms are the “most disadvantaged” by federal regulations. And the cost of compliance with federal regulations “absorbed about 14 percent of the U.S. national income.” (Could the correlation explain in part the erosion of the U.S. manufacturing base?)

Lamentation never moved a rock, though. So the attitude of manufacturers, distributors, and contractors is to make the best of it, doing whatever it takes to overcome obstacles and keep doing business. For those who could use a little boost to fortify their can-do attitudes, here is some practical advice from those who know our industry well.

Practical Approach

Adherence to regulations is a must. Yet it’s possible to view regulations positively and as a challenge to innovate. Successful businesses do just that.

“For years, Etowah Chemical Sales and Service has been cognizant about providing our customers with products that are safe for the environment,” says Terry Murray, Vice President—sales, at the company in Gadsden, AL. “We have developed products that have reached or exceeded our government’s regulations. We hold ourselves to high manufacturing standards and believe these standards set us apart…”

It is vexing at times to keep pace with regulations. Murray recommends seeing the big picture and considering common goals of businesses and regulators. “Government regulations are disconcerting to us, as they seem to be with all small businesses,” he explains. “However, we welcome the opportunity to make our planet safer.”

One of the biggest concerns about regulations is costs, to be sure. “Any time there is more government regulation, there is a fear about costs,” says Murray. “Often, larger companies are able to absorb these costs better than small to mid-sized companies. Our biggest concern is how much the cost of the regulations will add to our cost of business—and will we be able to pass these costs to our customers or will we have to absorb these costs?”

Even with the questions about how costs will be managed, there is no reason to be dispirited. “Overall, I believe we can maintain our competitive advantage in spite of additional government regulations,” says Murray, recounting the strategy and prospects at his company.

Still, Murray would like to see a broader commitment to providing a lift for U.S. manufacturers. “In the future, I would like to see a bigger focus on helping small businesses compete in a global economy that seems to favor larger businesses,” says Murray.

(Indeed, Murray’s observation about the costs that smaller businesses bear from regulation is documented in the Crain and Crain study already cited: Environmental compliance in 2009 dollars cost $22,594 per employee for companies with fewer than 20 employees and $4,865 per employee for companies with more than 500 employees.)

In some instances, there are significant ways that small businesses can reduce costs. Consider insurance and contractors. Even though a contractor might have only a few employees, joining forces with other contractors can create a larger pool that benefits everyone. That pool can be a professional association.

“Premiums are on the rise, but if you belong to an association, cost savings can accrue to 20 to 30 percent,” says Tom Svrcek, President of the J.D. Walters Insurance Agency, Inc. in Belle Vernon, PA. The association membership demonstrates “professionalism,” he explains. And his agency works regularly with members of such familiar organizations as PWNA, UAMCC, and PWRA.

In addition, associations provide opportunities for learning that are known to enhance safety on job sites. The education and certification workshops that associations provide are important to the reduction of risk, explains Svrcek. Determined risk reduction garners positive attention of those who establish the underwriting requirements for coverage.

Svrcek’s agency makes a concerted effort to market through associations. The association membership is particularly important for new contractors, he explains.

“The insurance market is getting a little more difficult,” says Svrcek. “Prices are on the rise, especially for start-up guys.”

Continuing education is not just a priority for contractors. It’s also of paramount importance for manufacturers and distributors.

“Comply with all the training [requirements],” says Brenda Purswell, President of Alklean Industries in Pasadena, TX. “We’re going through forklift training right now,” she explains, when talking with us in early December.

Make that forklift training required for all for recertification. Certification does not endure forever. Once certified for a piece of equipment or a procedure, employees must periodically re-demonstrate their competence. The certification process accomplishes two things: It keeps everyone sharp and ensures that any changes are understood and incorporated in the workday.

The best way to avoid higher than necessary premiums for workers’ compensation, liability, property, and other coverage is by having a close association with an insurance agent. “It’s important to work directly with your agent,” says Purswell. The agent can provide guidance about what can be done to minimize risk. “They will send you a checklist.”

Purswell emphasizes that when a company works to reduce risk on all fronts, the company is bolstering more than its own employees and bottom line. It is also benefitting the entire industry. The premiums that are set for a company generally are derived by the experience for the aggregate of similar companies in the industry.

Material, Energy, and the Future

Adhere and avoid grabbed most of the attention so far, so we conclude with some words about the need to anticipate. Those who are fans of the various iterations of the Star Trek television series know well the replicator on board. Similarly, everyone has read about—if not seen—3D printers, or the devices that can fabricate on site by a process of layering. They are not equivalent to replicators yet, but they trend in that direction.

As the 21st century progresses, innovation and production are going to change in dramatic ways. In the December 6, 2013, issue of Science, William B. Bonvillian, the director of the Washington, DC office of the Massachusetts Institute of Technology, reviews what’s happening and what’s likely to happen (“Advanced Manufacturing Policies and Paradigms for Innovation”).

According to Bonvillian, the shift to advanced manufacturing will include advanced materials synthesized as a precise match to the product being made. Which features are most important—strength, flexibility, weight, production cost, or all four? He sees biomaterials being synthesized in a biofabrication process.

Whether it is biofabrication, full integration of software with manufacturing chains from the design stage, extreme customization, or any number of other advances, there is going to be change in material acquisition and use. Anticipate the change. Appropriate it.