The increasing global nature of business and supply-chain relationships has had a tremendous impact on U.S. manufacturing over the last decade. And small and medium size manufacturers (SMMs) are adapting with favorable results.

New Trends Cut Both Ways

Two new trends are shaping the future of SMMs, says Jerry Jasinowski, president of the Manufacturing Institute, the research and educational arm of the National Association of Manufacturers (NAM). “First, large manufacturers are increasing their dependence on suppliers of components as they streamline their operations to increase productivity.”

Why is this occurring?

As the level of competition rises, manufacturers are forced to specialize to a greater and greater extent in order to become leaders or retain leadership in their core competencies. To achieve this, they are increasingly focusing on their strengths and shedding non-core functions. And in some cases, manufacturers are shedding various core functions as well.

This trend has benefited SMMs by enabling them to take over new manufacturing functions, expand their businesses in different areas, and further integrate themselves into supply chains of large manufacturers. However, the shedding of non-core functions, or put another way, the outsourcing of components — domestically and internationally — has other implications.

The second trend, Jasinowski says, is the development of increasingly competitive production in developing countries. As a result, outsourcing internationally has become more attractive.

Delivering More Value

To remain competitive, many SMMs are becoming more entrepreneurial and offering customers value that low-cost country suppliers can't match. This includes proprietary high-technology products, a willingness to customize, extraordinary service and parts support, flexible production runs and fast turnaround times, " Jasinowski says.

With the exception of high technology products, these factors are service related. And herein lies a major key to future success.

According to a Deloitte Research report, “Too often manufacturers view their service operations as ancillary businesses separate from and by no means equal in strategic or operational importance to the ‘core’ product business. This mindset is as risky as it is outdated.”

As more products become commoditized, the provision of quality services increasingly will generate real competitive advantage. And in cases where products become ubiquitous, quality services may become the only sustainable advantage.

SMMs are adapting and many are transforming their service departments from cost centers to profit centers — in good times as well as in times of economic downturn when service and parts sales often make up for lost business. Today, service contracts are increasingly boosting corporate profits as they become central to corporate strategy.

More Manufacturers Are Seeking Partnerships

A recent study by NAM says that SMMs “must now seek new partners at every stage of the global supply chain — from research and development through manufacturing, packaging, shipment, service and support — to capitalize on new growth opportunities.”

NAM President and CEO John Engler said, “Manufacturers must collaborate closely with new domestic and overseas partners to survive and thrive in the global supply chain. In today’s economy, small and medium manufacturers are more than just suppliers. They are helping to create the new technologies, products, services and business models that are vital for success, both here and abroad. By connecting with outside resources — customers, government and academia — small and medium manufacturers can swiftly expand their core competencies and gain economies of scale.”

Global Engagement Is Essential

According to NAM, SMMs represent more than 99 percent of America’s manufacturers. This translates into nearly 300,000 firms, which account for 40 percent of the value of U.S. production. With greater global engagement, SMMs can significantly boost their output.

But to achieve this, SMMs need to become more globally engaged. Recently, 30 percent of SMMs reported no sales or purchases abroad, and more than 60 percent reported less than 10 percent of their sales or components came from abroad.

On the upside, the number of small business exporters tripled over the last decade. And nearly half of the executives at SMMs recently surveyed said globalization is the driver most likely to influence their company's purchasing and supplier-management strategy over the next decade. This greater awareness is likely to result in more international growth.

Overall, SMMs need to offer competitively priced products with the service and support levels that customers can’t get from manufacturers in low-cost countries, says Deloitte Research. International expansion can provide part of the solution.

American Manufacturing Continues To Thrive

In 2006, the total value of U.S. manufacturers’ shipments exceeded $5 trillion, while manufacturers’ value added reached $2.3 trillion. Both these numbers have doubled since 1987, indicating the U.S. manufacturing sector is alive and well.

This fact, however, is often overlooked, since the number of manufacturing jobs continues to decline. Why? As manufacturing productivity has increased, fewer workers are turning out more products in less time. This is similar to what has occurred in the agricultural industry.

Nevertheless, as globalization boosts competitive pressures, manufacturers often are forced to find innovative ways to cut costs. But this can only go so far. And SMMs have little control over exorbitant energy and health care costs. Plus, many firms say they incur higher training costs since skilled workers often are difficult to find.

These issues present real challenges. But American SMMs are rising to the occasion. They are placing more emphasis on improved product design, quality, branding strategies, and of course, improved responsiveness to customer needs while seizing new profitable opportunities not widely recognized before.

This article appeared in January 2008. (CM)

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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