What's With Manufacturing?

June / July 2010 Volume 8 Number 3

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A new report prepared by the Hollings Manufacturing Extension Partnership (MEP) Board discusses the state of domestic manufacturing and the characteristics of good manufacturers and plots a course to improve the competitiveness of manufacturing. The MEP is managed by the National Institute of Standards and Technology, a unit of the Department of Commerce,  and the board is an external advisory body created to provide guidance and advice from the perspective of industrial extension customers and providers.  The  report finds that there are reasons for concern about the industry’s future, but there are also reasons for optimism. The report was prepared by Gary Yakimov and Lindsey Woolsey and MEP staff members. Here is a summary of findings.

Manufacturing in the united states is at a critical crossroads. Policymakers have a choice to establish a framework to guide the future of manufacturing and to accelerate adjustments to markets or leave its future up to serendipity, chance, complacency and indifference. Policymakers can help manufacturing firms change, innovate, move into new markets and adapt to a constantly changing global economic environment or operate under the false assumptions that the industry is not worth the effort. As the third largest economic sector in the economy, one that pays premium wages, and creates more total direct and indirect jobs than any other sector, manufacturing is worth a focused, pro-active federal policy agenda. Without one, the risks to living standards, national security and economic security are too great.

Manufacturing is an important part of the nation’s competitive backbone and represents a large, complex and diverse cluster of industries made up of individual firms that undertake a broad spectrum of activities. These activities extend far beyond production. They include research, design, logistics and distribution, technological services, back-office support and customer care, among others. Over the past several decades, each of these activities has been outsourced to some degree, depending on the precise cost and quality needs of an individual firm. As a result, manufacturing has become a decentralized, complex web of suppliers and distributors that extends across the globe. Indeed, in this era of globalization, it is often hard to identify the nationality of a firm. Traditional large U.S. manufacturers have many overseas operations, while foreign companies like Toyota and Novartis have U.S. facilities that employ thousands of. workers. It is this picture that makes defining U.S. manufacturing more complex than it once was, but perhaps more important too. Acknowledging its complexity, the MEP Advisory Board believes, will lead to a set of modern and relevant public policies that will increase competitiveness for all manufacturers, and therefore be good for U.S. workers, communities, and consumers.

The Complex Realities of Manufacturing
Recent reports and studies paint a diverse portrait of the health and vitality of the current and future manufacturing industry in the U.S., as well as its importance in the  economy. Is it thriving or merely surviving? Manufacturers themselves disagree about the health of their industry, some painting a rosy picture of a leaner, stronger sector than ever before; others warning that the industry is in dire condition. The reality lies somewhere in between. Manufacturing is complicated and cannot be captured in a single data point nor is it captured in a single picture of impending demise or dramatic revival.

However, there are a set of complex realities that apply to the industry broadly. Understanding these complex realities is critical to understanding how and why federal policy action can help shape a more vital industry, and therefore more prosperous communities. Consider the following points:

• Manufacturing remains a significant part of the economy, generating $1.64 trillion worth of goods in 2008. If U.S. manufacturing were a country in itself it would represent the 8th largest economy in the world.
But manufacturing is no longer the dominant sector of the  economy, yet it remains a critically important component. As of 2008, it represented 12 percent of GDP, down from nearly 30 percent in the early 1950s.
• The U.S. share of global manufacturing value added is holding steady and among all U.S. exports, manufactured products are the most dominant, accounting for 57 percent of total value.
But the U.S. trade deficit for high-tech products in 2007 was $54 billion, nearly doubling the $29 billion deficit of 2000.
• Manufacturing pays nine percent higher in wages and benefits than the overall economy, and nearly one in five jobs in science and engineering are in the manufacturing sector (2nd highest).
But employment in manufacturing as a share of total U.S. employment has fallen from about one in three jobs in 1950 to one in ten jobs today.
• In 2006 the U.S. performed an estimated $62 billion of basic research, $75 billion of applied research, and $204 billion of development.
But both the business sector’s share of research and development as well as the federal share are in decline. More than half of all basic research in the U.S. is now performed at universities and colleges.

Characteristics of Successful Manufacturers
The MEP board believes that rebuilding a strong, sustainable innovation and product development and deployment capacity will require building on what works for firms. Through a literature review of dozens of reports and studies and interviews with board members, the following four interconnected responses to change emerged. The board is encouraged that for each of the four major opportunity areas, there is an MEP or MEP Center partner-related program already in place that can help foster these changes in new firms, or to help leading firms reach even higher levels.

• Innovate constantly to adapt to economic and technological changes. Only 20 percent of manufacturers can be considered truly advanced and engaged in that they:
(a) do not panic in the face of bad economic news and look for long-term opportunities; (b) will not be caught flat-footed by the impending worker imbalance and shortages; (c) do not fear the growing influence of China, India, and other low-cost producers; and (d) do not allow their products to be commoditized by purchasing agents. According to a survey of over 1,000 manufacturers, having a well-defined process for innovation was identified as the primary driver of excellence in a disciplined approach to manufacturing. This includes designing structured, standardized processes for generating ideas, developing them, and bringing them to market. Customer-focused innovation and mass customization were other innovation trends among leading manufacturers.
• Embrace green and green lean. Manufacturers have been embracing the concept of lean for many years. There are many variants to lean but MEP defines lean manufacturing as the establishment of a systematic approach to eliminating waste and creating flow throughout the whole company.
Companies that are both green and lean are seeking to reduce their environmental impact while simultaneously increasing their efficiency, productivity, and profitability. An example of this is reduced water consumption that helps to reduce work-in-process costs, increase productivity and quality and increase profits. More and more manufacturers are requesting that their suppliers adhere to standards of environmental quality and processes. These include firms such as Hewlett-Packard, Nokia, Ericsson and Bristol-Myers-Squibb. MEP partners with the Environmental Protection Agency to provide the Green Suppliers Network that helps reduce the environmental impact of small and mid-sized manufacturers while simultaneously increasing those companies’ efficiency, productivity and profitability, and thus their competitiveness within and across the supply chain.
• Recognize and navigate opportunities in the global value chain. Manufacturers are thinking about globalization, offshoring, and the supply chain in different ways. Success in the global marketplace for manufacturers looks different depending on the sub-sector and the size of the firm. For example, some firms are finding that as expertise develops overseas they have even more reason to send design, development and production across the world. Other manufacturers are moving production and design back to the U.S. as the transportation and logistics costs of supply chain management become prohibitive and energy costs continue to increase. Still others are expecting that future production may be accomplished in many smaller facilities in the U.S. and abroad to meet environmental concerns and react to special market demands.

In this emerging structure, supply chains are evolving and becoming less linear. First-tier suppliers and customers are now involved in design, manufacturing and delivery, and original equipment manufacturers are forming partnerships with firms deeper into the supply chain because they are attracted to unique technical knowledge, process and production expertise.  One way to maintain competitiveness in this environment is through collaboration and cluster-based partnerships between like firms, government and educational institutions. Some manufacturers are morphing their product and service offerings. Regardless, navigating the complexities of the global supply chain will continue to be important to manufacturers. The National Innovation Marketplace (www.usinnovation.org) is an MEP initiative connecting manufacturers to one another and to innovators looking to take their product to market.

• Develop and retain current and future talent. Despite the economic downturn and a perceived lack of jobs, data from a 2009 survey of manufacturers indicate that skills shortages still exist, especially for the most profitable companies and for skilled production workers, scientists and engineers.  Evidence exists to suggest the lack of skilled workers extends to all levels of a manufacturing enterprise. The National Association of Manufacturers has identified many workforce challenges including dissatisfaction among manufacturers with the quality of K-12 education and the lack of adequate and accurate career counseling as well as the negative perceptions and attitudes of young workers with careers and job satisfaction in manufacturing. Perhaps rebranding manufacturing as the process of moving from product innovation into product development and deployment (including new sales and new markets) is a way to engage young workers who are interested in idea generation and research and development.

A critical partner in training the current and future workforce is the community college system. More than half of the community colleges (approximately 1,200 institutions) offer specialized training in manufacturing skills. There are about 871,000 students enrolled in these courses.

Beyond the skill gap issues is a deeper issue around developing a talent-driven firm. According to the recent report by the Aspen Institute, most businesses are still based on well-established command and control structures and have a hard time accepting systems, like those built on web-based social networking tools, that encourage bottom-up horizontal collaboration, even internally. As a result, the most exciting innovations in building talent-driven firms may well occur in smaller entrepreneurial firms and at the edge of large enterprises rather than their core.