American small and medium-size manufacturers (SMMs) are playing an increasingly important role in our nation’s economy. They also are encountering a whole new set of challenges presented by today’s new global realities. Nevertheless, those who have adapted have boosted their level of global competitiveness, created new, more sophisticated supply-chain opportunities, and have taken big steps to secure their future.

A Brave New World

According to the National Association of Manufacturers (NAM), SMMs represent more than 99 percent of America’s manufacturers and account for 40 percent of the value of U.S. production. Their success in the global business environment is essential.

Jerry Jasinowski, president of NAM’s Manufacturing Institute, says there are two new trends shaping the future of SMMs. “First, large manufacturers are increasing their dependence on suppliers of components as they streamline their operations to increase productivity.” This has enabled SMMs to innovatively expand their businesses into areas formerly owned by large manufacturers. It also has put SMMs square in the middle of large manufacturers’ supply chains.

Jasinowski says “The second trend — the development of increasingly competitive production in developing countries — cuts the other way and has toughened the landscape for all manufacturers, including SMMs.”

Today’s New Challenges Demand New Strategies

As the U.S. manufacturing sector continues to evolve, more and more producers will shed non-core functions and outsource them across the country and around the world. As this progresses, others will outsource core operations as well.

To stay in business, SMMs will need to be entrepreneurs who can offer value to their customers that low-cost overseas competitors cannot match, Jasinowski says. This includes “proprietary high-technology products, a willingness to customize, extraordinary service and parts support, flexible production runs and fast turnaround times. These trends make it clear that the performance of all U.S. manufacturing is tied more than ever to the success of SMMs.”

Don’t Underestimate the Importance of Quality Services

In developed markets, global pricing pressures have turned products into commodities. As a result, U.S. companies need to emphasize and deliver additional value. And a tremendous opportunity is in the provision of quality services by manufacturers that are unlikely to be reproduced abroad any time soon.

This cannot be underestimated.

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.”

In times of economic downturn, service and parts sales often have made up for lost business. But today, service contracts are increasingly boosting corporate profits. For example, Deloitte Research says “Rolls-Royce provides airlines with what it calls “Power By The Hour,” selling its engines along with services to maintain, repair, and overhaul them for many years. Service revenue already accounts for about 53 percent of Rolls-Royce’s $11 billion-plus in annual revenues.”

Other very successful manufacturers make service central to their corporate strategy, tailoring the service business around customer requirements in order to improve customer satisfaction, loyalty and overall business performance.

Establishing Partnerships Is More Important than Ever

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.”

These partnerships also will be instrumental by empowering SMMs to take on new responsibilities. Instead of merely building to specifications provided by larger manufacturers, SMMs will need to increasingly innovate on behalf of large firms. According to NAM, this new global manufacturing supply chain is a whole new frontier that carries new risks — risks that will intensify as goods move around the world in an unprecedented way.

International Expansion Is a Must

As the value of the dollar has declined, U.S. exports have increased. And in many cases, company exports have risen exponentially. This is especially important since U.S. domestic growth is slowing. According to The Wall Street Journal, “Export growth in the late summer helped offset the housing sector’s drag on gross domestic product (GDP) in the third quarter. Exports contributed 1.4 percentage points to GDP’s annualized growth rate of 4.9 percent. “ These numbers could be greatly improved.

More than 60 percent of U.S. SMMs recently surveyed by NAM reported less than 10 percent of their sales or components came from abroad. And 30 percent reported no sales abroad. SMMs need to offer competitively priced products with the service and support levels that customers can’t get from manufacturers in low-cost countries, Deloitte Research says. International business can provide the solution. Conversely, if manufacturers don’t expand abroad their risks will grow.

Continued Improvement Is Essential

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. In the future, SMMs will have more responsibilities and likely will contribute a greater percentage of overall output.

SMMs have rolled with the punches, made necessary changes and achieved a great deal of progress over the last decade. Nevertheless, in our fast-changing global environment, they will need to push the envelope in order to tackle new challenges not yet surfaced.

This article appeared in Impact Analysis, January-February 2008.

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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