aa manufacturing 2010 mep advisory report 4 24l

8/8/2019 AA Manufacturing 2010 MEP Advisory Report 4 24l

1/44

Innovation and Product Development

in the 21st CenturyGary Yakimov and Lindsey Woolsey with Contributions rom MEP Sta

Hollings Manufacturing Extension Partnership Advisory Board February 2010


2/44

Introduction .....................................................................................................7

Exploring the Complex Reality o Manuacturing Today .......................9

Is U.S. Manuacturing Disappearing? .........................................................10

Is Manuacturing Still Important to the U.S. Economy? .............................10

Are There High Quality Manuacturing Jobs Let in the U.S.? ...................13

Can Innovation Alone Rebuild the U.S. Economy? ...................................... 14

Can Firms Simply Follow the Market to Stay Competitive? .......................16

Characteristics o Successul Manuacturers .......................................18

Innovate Constantly to Adapt to Economic and Technological Changes ....19

Embrace Green and Green Lean ..................................................................21

Recognize and Navigate Opportunity in the Global Value Chain ................23

Develop and Retain Current and Future Talent ...........................................27

Opportunities or Action .............................................................................31

Innovate Constantly to Adapt to Economic and Technological Changes ....31

Embrace Green and Green Lean ..................................................................32

Recognize and Navigate Opportunity in the Global Value Chain ................33

Develop and Retain Current and Future Talent ...........................................34

Appendix .......................................................................................................36

A: U.S. Products Lost or At-Risk to Globalization .......................................36

B: Understanding the Global Marketplace ..................................................37

C: Sustaining the Supply Chain: Suggested Model or Decision Making ..38

Acknowledgements ....................................................................................38

Endnotes ........................................................................................................40

Table of Contents


3/44

2February 2010 | Hollings Manufacturing Extension Partnership Advisory Board

Manuacturing policy in the U.S. is at a critically important juncture. No ewer than a dozen reports

and studies with various conclusions and recommendations have been issued regarding manuacturing

since the Presidential Election o 2008. Most o these reports were drated by special interests withpre-determined agendas that paint manuacturing as either a leaner, stronger sector than ever beore

or an industry in dire condition. At the Hollings Manuacturing Extension Partnership Advisory Board

(MEP Board) we believe the truth lies somewhere in between. The reality about manuacturing is that

it is complicated and not easily captured by a single data point or a single picture o either impending

demise or dramatic revival.

Our report and the subsequent Opportunities or Action call or a ederal policy that promotes technical

assistance over compliance and recognizes that Americas manuacturers need the public, private,

and education sectors operating in unison and taking responsibility or a competitive uture based

on reasonable economic undamentals. No one entity can address what ails manuacturing, nor can one successul frm be held up

as indicative o appropriate solutions.

This paper lays out the complex realities o the manuacturing industry, identifes responses o successul frms to the dynamic

technological and economic changes in ront o them, and suggests opportunities or action that can be taken to help leading

manuacturers retain their global competitiveness while helping all manuacturers navigate the difcult terrain beore them. On

behal o the MEP Advisory Board I want to stress the need to move orward with a manuacturing policy. While some will argue

that we should not have a ormal industrial policy, we believe we already have one. What has evolved as our policy is a disjointed

set o interventions related to taxation, trade, health care, tort reorm, energy, regulation o the fnancial sector, and the by-product

o a near-heroic eort to restructure the domestic automobile assembly industry. The law o unintended consequences is our de acto

policy. The U.S. has a choice: do nothing and continue as is, or establish a set o policies that help leading American manuacturing

frms make the transition to product innovation, development, and deployment in new sales and new markets.

We are encouraged by the events o late 2009 and the eorts o the Vice-Presidents Middle Class Task Force to recommend ormal

manuacturing policy options. We look orward to a renewed conversation about the uture importance and direction o manuacturing

as the economy continues its recovery. We also encourage that ederal and state governments recognize that this is a time o transitionor many programs o relevance to the nations manuacturing base. They will need to respond to new policy mandates related to climate

change and environmental quality. They will need to help employers respond to structural changes in the value o the dollar versus other

currencies. And they will have to work hand-in-hand with employers to sustain a globally competitive workorce.

Just as the MEP program systematized and popularized lean manuacturing over the past 20 years, there is an important role or

intermediary organizations in developing tools and systems o practice that will sustain American manuacturing competitiveness

in the uture. Many o these organizations and their contributions are cited in this report; some are not. However, all are part o the

important industrial commons that is the publics contribution to a prosperous uture. We can do more to learn about these programs,

anticipate demands that will be made upon them, and make them more responsive to the increasingly competitive marketplace.

The MEP Board, MEP national program ofce and the nationwide system o MEP afliates look orward to the continued conversation

about the uture o U.S. manuacturing.

Sincerely,

Edward W. (Ned) Hill, Chair

Hollings MEP Advisory Board and

Dean, Maxine Goodman Levin College o Urban Aairs, Cleveland State University

Letter from the Chair

Edward W. (Ned) Hill, Chair


4/44

3 Hollings Manufacturing Extension Partnership Advisory Board | February 2010

Introduction and Purpose

U.S. manuacturing isat a critical crossroads.

Policymakers have a

choice to establish a

ramework to guide the

uture o manuacturing

in the U.S. and to

accelerate adjustments

to markets or leave its

uture up to serendipity,

chance, complacency,

and indierence. U.S.policymakers can help

manuacturing rms

change, innovate, move

into new markets, and

adapt to a constantly

changing global

economic environment

or operate under the

alse assumptions that the industry is not worth the eort. As the third largest economic sector in the U.S. economy, one that

pays premium wages, and creates more total direct and indirect jobs than any other sector, manuacturing is worth a ocused,

pro-active ederal policy agenda. Without one, the risks to U.S. living standards, national security, and economic security are

too great.

Manuacturing is an important part o the nations competitive backbone and represents a large, complex and diverse cluster

o industries made up o individual rms that undertake a broad spectrum o activities. These activities extend ar beyond

production. They include research, design, logistics and distribution, technological services, back-oce support, and customer

care, among others. Over the past several decades, each o these activities has been outsourced to some degree, depending

on the precise cost and quality needs o an individual rm.

As a result, manuacturing has become a decentralized, complex web o suppliers and distributors that extends across

the globe. Indeed, in this era o globalization, it is oten hard to identiy the nationality o a rm. Traditional large U.S.

manuacturers have many overseas operations, while oreign companies like Toyota and Novartis have U.S. acilities thatemploy thousands o U.S. workers. It is this picture that makes dening U.S. manuacturing more complex than it once was,

but perhaps more important too. Acknowledging its complexity, the MEP Advisory Board believes, will lead to a set o modern

and relevant public policies that will increase competitiveness or all manuacturers, and thereore be good or U.S. workers,

communities, and consumers.

Executive Summary

What makes this transition work?

Manuacturers that innovate, navigate the global

value chain, cultivate workorce talent, and

embrace lean and green. Public policies that help

not hinder, private sector behavior.

New ideas about processes, services,

and products are generated constantly on

shop foors, in research institutions, and in

garages around the country.

Thats innovation.

What stops the process?An inability by manuacturerers to access new

technologies, new markets, skilled workers, and

ecient energy practices.

Disconnected public policies ocused too heavily on

compliance and not technical assistance.

Producing innovative goods, and constantly improving

the process and service components that comprise

a product Thats Manufacturing in the U.S.

today.


5/44


Exploring the Complex Realities o Manuacturing Today

Recent reports and studies paint a diverse portrait o the health and vitality o the current and uture manuacturing industry

in the U.S., as well as its importance in the U.S. economy. Is it thriving or merely surviving? Manuacturers themselves

disagree about the health o their industry, some painting a rosy picture o a leaner, stronger sector than ever beore; others

warning that the industry is in dire condition. The reality lies somewhere in between; manuacturing is complicated andcannot be captured in a single data point nor is it captured in a single picture o impending demise or dramatic revival.

However, there are a set o complex realities that apply to the industry broadly. Understanding these complex realities

is critical to understanding how and why ederal policy action can help shape a more vital industry, and thereore more

prosperous communities. Consider the ollowing points:

ManufacturingremainsasignicantpartoftheU.S.economy,generating$1.64trillionworthofgoodsin2008.IfU.S.

manuacturing were a country in itsel it would represent the 8th largest economy in the world. But

Manuacturing is no longer the dominant sector o the U.S. economy but it remains a critically important component.

As o 2008, it represented 12% o GDP, down rom nearly 30% in the early 1950s.

TheU.S.shareofglobalmanufacturingvalueaddedisholdingsteadyandamongallU.S.exports,manufacturedproducts

are the most dominant, accounting or 57% o total value. But.

TheU.S.tradedecitforhigh-techproductsin2007was$54billion,nearlydoublingthe$29billiondecitof2000.

Manufacturingpaysninepercenthigherinwagesandbenetsthantheoveralleconomy,andnearlyoneinvejobsin

science and engineering are in the manuacturing sector (2nd highest). But

Employment in manuacturing as a share o total U.S. employment has allen rom about one in three jobs in 1950 to

one in ten jobs today.

In2006theU.S.performedanestimated$62billionofbasicresearch,$75billionofappliedresearch,and$204billion

o development. But

Both the business sectors share o research and development as well as the ederal share are in decline. More than

hal o all basic research in the U.S. is now perormed at universities and colleges.

Characteristics o Successul Manuacturers and Opportunities or Action

The Hollings Manuacturing Extension Partnership Advisory Board (MEP Board) believes that rebuilding a strong,

sustainable innovation and product development and deployment capacity in the U.S. will require building on what works

or rms. Through a literature review o dozens o reports and studies and interviews with Board members, the ollowing

our interconnected responses to change emerged. The Advisory Board is encouraged that or each o the our major

opportunity areas, there is an MEP or MEP Center partner related program already in place that can help oster these changesin new rms, or to help leading rms reach even higher levels.


6/44


Innovate constantly to adapt to economic and technological changes

Only 20 percent o manuacturers can be considered truly advanced and engaged in that they:

(a) do not panic in the ace o bad economic news and look or long-term opportunities;

(b) will not be caught fat-ooted by the impending worker imbalance and shortages; (c) do not

ear the growing infuence o China, India, and other low-cost producers; and (d) do not allowtheir products to be commoditized by purchasing agents at their OEM customers.1 According

to a survey o over 1,000 manuacturers, having a well-dened process or innovation was

identied as the primary driver o excellence in a disciplined approach to manuacturing. This

includes designing structured, standardized processes or generating ideas, developing them,

and bringing them to market.2 Customer-ocused innovation and mass customization were

other innovation trends among leading manuacturers.

Embrace green and green lean

Manuacturers have been embracing the concept o lean or many years. There are manyvariants to lean but MEP denes lean manuacturing as the establishment o a systematic

approach to eliminating waste and creating fow throughout the whole company. Companies

that are both green and lean are seeking to reduce their environmental impact while

simultaneously increasing their eciency, productivity, and protability. An example o

this is reduced water consumption that helps to reduce work-in-process costs, increase

productivity and quality, and increase prots. More and more manuacturers are requesting

that their suppliers adhere to standards o environmental quality and processes. These

include rms 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 o small and mid-sized manuacturers while

simultaneously increasing those companies eciency, productivity, and protability, andthus their competitiveness within and across the supply chain.

Recognize and navigate opportunities in the global value chain

Manuacturers are thinking about globalization, oshoring, and the supply chain in dierent

ways. Success in the global marketplace or manuacturers looks dierent depending on

the sub-sector and the size o the rm. For example, some rms are nding that as expertise

develops overseas they have even more reason to send design, development, and production

across the world. Other manuacturers are moving production and design back to the U.S.

as the transportation and logistics costs o supply chain management become prohibitive

and energy costs continue to increase. Still others are expecting that uture production may

be accomplished in many smaller acilities in the U.S. and abroad to meet environmental

concerns and react to special market demands.

1. Streamline innovation andgrowth services targetedto manuacturers.

2. R&D investments shouldbe targeted to wheremeasures and outcomesindicate.

3. Invest in clean energyinnovation and expand theclean energy supply chainwhile clariying linkagesbetween green lean andcontinuous improvementand product development.

4. Increase awareness,understanding o, andimplementation o greenand new energy economyindustrial standards.

5. Create market opportunitiesor global challenges.

6. Increase eorts to helpmanuacturers navigateexport markets andstreamline technologyexport processes.

7. Increase eorts to helpmanuacturers diversiy

their markets.8. Improve the data available

to present the value omanuacturing.


7/44


In this emerging structure, supply chains

are evolving and becoming less linear.

First-tier suppliers and customers are

now involved in design, manuacturing,

and delivery, and original equipmentmanuacturers are orming partnerships

with rms deeper into the supply

chain because they are attracted to

unique technical knowledge, process,

and production expertise.3 One way

to maintain competitiveness in this

environment is through collaboration

and cluster-based partnerships between

like rms, government, and educational

institutions. Some manuacturers are

morphing their product and serviceoerings. Regardless, navigating the

complexities o the global supply chain will continue to be important to manuacturers. The National Innovation

Marketplace (www.usinnovation.org) is an MEP initiative connecting manuacturers 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 o jobs, data rom a May 2009 survey

o manuacturers indicate that skills shortages still exist, especially or the most protable

companies and or skilled production workers, scientists, and engineers.4 Evidence exists to

suggest the lack o skilled workers extends to all levels o a manuacturing enterprise. The

National Association o Manuacturers (NAM) has identied many workorce challenges

including dissatisaction among manuacturers with the quality o K-12 education and the lack

o adequate and accurate career counseling as well as the negative perceptions and attitudes

o young workers with careers and job satisaction in manuacturing.5 Perhaps rebranding

manuacturing as the process o moving rom 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 uture workorce is the community college system. More than hal o the

community colleges (55% or approximately 1,200 institutions) oer specialized training in manuacturing skills. There are

about 871,000 students enrolled in these courses.6

Beyond the skill gap issues is a deeper issue around developing a talent-driven rm. 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.7 As a result, the most exciting innovations in building talent-driven rms may well occur in smaller

entrepreneurial rms and at the edge o large enterprises rather than their core.

9. Rebrand manuacturingas product innovation,development, anddeployment.

10. Promote and expandcareer pathways.

11. Endorse and promotenational certication andskill standards related tomanuacturing.

12. Partner with ederal, state,and local workorce systemto proactively avert layos.

Source: Clarity is Missing Link in Supply Chain, Phred Dovorak, Wall Street Journal, 5/18/2009


8/44


U

.S. manuacturing is at a critical crossroads. Policymakers have a choice to establish a ramework to guide

the uture o manuacturing in the U.S. and to accelerate adjustments to markets or leave its uture up to

serendipity, chance, complacency, and indierence. U.S. policymakers can help manuacturing rms change,

innovate, move into new markets, and adapt to a constantly changing global economic environment, or operate

under the alse assumptions that the industry cannot compete and thus investment in new tools and ways o operating are

not worth the eort. As the third largest economic sector in the U.S. economy, one that pays premium wages and creates

more total direct and

indirect jobs than any other

sector, manuacturing is

worth a ocused, pro-active

ederal policy agenda.

Without one, the risks

to U.S. living standards,

national security, and

economic security are

too great.

Manuacturing is an

important part o the

nations competitive

backbone and represents a

large, complex, and diverse

cluster o industries made

up o individual rms

that undertake a broad

spectrum o activities.

These activities extend ar beyond production. They include research, design, logistics and distribution, technological services,

back-oce support, and customer care, among others. Over the past several decades, each o these activities has been

outsourced to some degree, depending on the precise cost and quality needs o an individual rm. As a result, manuacturing

has become a decentralized, complex web o suppliers and distributors that extends across the globe. Indeed, in this era o

globalization, it is oten hard to identiy the nationality o a rm. Traditional large U.S. manuacturers have many overseas

What makes this transition work?Manuacturers that innovate, navigate the global

value chain, cultivate workorce talent, andembrace lean and green. Public policies that help

not hinder private sector behavior.

New ideas about processes, services,

and products are generated constantly on

shop foors, in research institutions, and in

garages around the country.

Thats innovation.

What stops the process?An inability by manuacturerers to access new

technologies, new markets, skilled workers, and

ecient energy practices. Disconnected public polocies

ocused too heavily on compliance and not technical

assistance.

Producing innovative goods, and constantly improving

the process and service components that comprise

a product Thats Manufacturing in the U.S.today.

Introduction


9/44


operations, while oreign companies like Toyota and Novartis have U.S. acilities that employ thousands o U.S. workers.

It is this picture that makes dening U.S. manuacturing more complex than it once was, but perhaps more important too.

Acknowledging its complexity will lead to a set o modern and relevant public policies that will increase competitiveness

or all manuacturers, and thereby benet U.S. workers, communities, and consumers.

To understand the uture competitive position o U.S. manuacturing, the backdrop o the past decade must be understood.

Economic policy o the past decade was based on an expensive dollar, unsustainable trade imbalances in the goods sector,

and delayed reaction to new global competitive realities. Going orward, global markets will demand manuactured goods

rom America as trade balances correct, but only as long as the nations manuacturing inrastructure is intact so that it can

respond to market signals that will inevitably come with recovery rom the current recession.

So how does U.S. manuacturing remain competitive? An important actor will be to more clearly dene a central constraint

on the growth o the manuacturing sector the ability to translate innovation into commercial products. Federal policy can

help renew manuacturing in America by improving the process o transition rom research and development to domestic

product design, manuacturing, and product deployment. Unortunately, many o todays manuacturers suer rom a lack o

access to new technologies, new processes, new markets, and a skilled workorce to make this transition. Many rms have

knowledge about what needs to be done but need help in taking appropriate action. Other rms must be educated toward

new opportunities. Current public policies can do more to assist U.S. rms at the scale needed to compete.

Over the past several decades, a disjointed set o interventions related to taxation, trade, health care, tort reorm, energy,

and others has evolved in the U.S. in place o a ocused manuacturing policy. In many ways, we have allowed the law o

unintended consequence to shape our economic competitiveness. This de-acto industrial policy has not kept pace with the

changing nature o globalized manuacturing, and in some cases hinders manuacturers rom staying competitive. But it is not

too late to take action. The U.S. has a choice: do nothing and continue as is or establish a set o policies that help rms make

the transition to product innovation, product development, and product deployment.

This paper seeks to set the context or a new discussion about U.S. manuacturing, one that supplements the concept o

manuacturing based solely on production with that o product innovation ,development, and deployment. The term

manuacturing is raught with traditional biases and young workers and students see no uture in it. By changing the

oundational context, we see an opportunity to reinvigorate the conversation so that policy makers and the public get excited

about innovation and product development and the resulting production in a way that transorms the national dialogue about

our industrial competitiveness.

We must consider the elements o a successul manuacturing sector, starting with innovation and moving through the

process and transitions necessary or product design, manuacture, and product deployment. Thinking o manuacturing

in these terms is critical to understanding where ederal policy can make a dierence.

This paper explores common perceptions (and misperceptions) about manuacturing, moving through the characteristics o

successul manuacturers, and presents opportunities or action at the ederal policy level. We believe that this approach

provides valuable insight into the set o pro-active U.S. ederal policies that will enable U.S. manuacturing and manuacturers

to resume their growth, as indicated by a growth in the percentage o GDP and a concurrent improvement in the U.S. balance

o trade in goods.


10/44


Exploring the Complex Realityof Manufacturing Today

Recent reports and studies paint

a diverse portrait o the healthand vitality o the current and

uture manuacturing industry in

the U.S., as well as its importance in the U.S.

economy. Is it thriving or merely surviving?

Manuacturers themselves disagree about

the health o their industry; some paint a

rosy picture o a leaner, stronger sector

than ever beore, while others warn that

the industry is in dire condition. The reality

lies somewhere in between. To help discern

the true picture o U.S. manuacturing, theHollings Manuacturing Extension Partnership

Advisory Board (MEP Board) issues this

report to increase the knowledge about the

true state o manuacturing, the public policy

opportunities or its sustained economic

growth, and implications or the MEP Program.

An eective ederal policy agenda must

start with an inormed perspective about

the reality o the industry. The reality about

manuacturing is that it is complicated itis not captured in a single data point nor is it

captured in a single caricature o impending

demise or dramatic revival. But there is a set o realities that apply to the industry broadly. Understanding these realities

is critical to understanding how and why ederal policy action can help shape a more robust industry, and thereore more

prosperous communities.


11/44


Is U.S Manufacturing Disappearing?

For years we have recognized and acknowledged

the transition rom a production-based economy to a

service-based economy. Yet, even beore the bumpyride experienced by the nancial and real estate

sectors over the past two years, data demonstrated

that manuacturing remains a signicant part o the

U.S. economy. However, key indicators remain mixed

on the true condition o the industry.

Manuacturing generated $1.64 trillion worth

o goods in 2008 despite a recession that

dramatically impacted the domestic automobile

industry - and infation-adjusted value added has

increased by 22 percent over the past ten years. IU.S. manuacturing were a country in itsel, it would

represent the 8th largest economy in the world.8

Even so, manuacturing is no longer the dominant sector o the U.S. economy. However, it remains a critically important

component. As o 2008, manuacturing represented 12 percent o GDP, which is a signicant decline rom nearly 30 percent

in the early 1950s. This is a reality o economic development - as wealth increases and real wages rise, amilies consume

more services. Despite its declining share o the value o GDP, the real value or manuactured output has kept pace with the

economy or ty years. Total output in U.S. manuacturing reached its all time high in 2008, producing over $1.6 trillion in

added value.9

Is Manufacturing Still Important to the U.S. Economy?

Trade data paints a troubling picture. The U.S. is simply no longer an exporting nation. As o

October 2009, the U.S. trade decit or all goods and services was $32.9 billion and while

some sectors are doing better than others, it is a gloomy snapshot overall.10 For example, in

2000 the U.S. exported $29 billion more high-tech products than we imported and by 2007

this had turned into a $54 billion trade decit.11

While the U.S. high-tech manuacturing sector is still relatively strong, it ceased being the

world leader in high-technology production in 2003 when overtaken by China. During the

1990s, U.S. high-technology industries (communications equipment, computers and oce

machinery, pharmaceuticals, scientic instruments, and aerospace) accounted or about

20 percent o the worlds high-technology exports, approximately twice the level o all

other U.S. manuacturing industries. Starting in the late 1990s, the U.S. world export share

declined continuously across all ve high-technology manuacturing industries, dropping

to an average o 12 percent o the worlds exports in 2005. Losses in communications

A survey o 1,000 Americans

in 2009 indicated that 82% o

respondents thought manuacturing

important to U.S. economic

prosperity, and identied it as the

domestic industry most importantto the U.S. in helping maintain

a strong national economy.

Public View o Manuacturing, Deloitteand the Manuacturing Institute, June 2009


12/44


equipment, oce machinery, and

computers, which collectively

account or nearly 60 percent o

U.S. high-technology exports,

primarily drove the overalldecline.12

Despite export losses, the

U.S. still has the single largest

share o high-technology value-

added produced in the world

(35 percent in 2005). This is

an economic sector where the

rate o growth in world gross

revenue in high technology

manuacturing has been doublethat o non-high technology

manuacturing sectors over

the past 20 years. The U.S.

is ranked rst in value-added

world share in three o ve

high-technology industries

(scientic instruments, aerospace,

and pharmaceuticals) and

is ranked second in the

other two (communications

equipment, oce machinery andcomputers).13

There are a handul o industries

that account or a large share

o exports. These include:

computers and electronics, transportation equipment (including aerospace), chemicals, non-electrical machinery,

primary metals, petroleum and coal, apparel and accessories, electrical equipment, abricated metals, ood and

kindred, plastics and rubber, and leather.

As o 2008, the only two signicant industries in which the U.S. has a trade advantage are chemicals and

non-passenger-vehicle transportation equipment (including aerospace).

Despite all o this, the sky is not alling. There are several trade indicators that refect a positive light on the state

o U.S. manuacturing. According to the recently released Facts about Modern Manuacturing: 8th Edition by the NAM:14

TheU.S.shareofglobalmanufacturingvalueaddedisholdingsteadyatalittlelessthan25percent...butChinas

share is now 15 percent and gaining rapidly.


13/44


AmongallU.S.exports,

manuactured products are the

most dominant, accounting or

57 percent o total value. Services

are at 30 percent, agriculture at6 percent, and all others at 7 percent.

Tradedindustrieshaveaverypositive

impact on overall wages. Employees

in the top-third o the most trade

intensive industries (where combined

exports and imports amount to at

least 70 percent o their domestic

industrial output) earn an annual

total compensation package o about

$86,000,47percentmorethaninthe

least-third trade engaged sectors

ofmanufacturing($58,614).Those

in the middle-third trade engaged

sectorsearn$67,963.

TheU.S.attractsthemostforeign

direct investment o any nation in

the world as investors continue to be attracted by its large and open market, the quality o its inrastructure, high income

levels and access to cutting-edge technology and research. U.S. manuacturing aliates o oreign rms now employ

about2millionmanufacturingworkersandsellabout$1.1trillioningoodseachyear(asof2006).Foreignrmsnow

employ about 1 in 12 U.S. manuacturing workers.

There is a business case or investing in manuacturing and in manuacturers. Despite the current trade imbalance, U.S.

manufacturersstillexported$86.8billiondollarsingoodsduringAugust2009.TheU.S.remainsverycompetitiveinmany

industries and there are opportunities or owners and investors as well as policy makers to continue building on the strengths

o manuacturing to help revitalize the U.S. economy. There is an economic development case to be made as well. U.S.

manuacturing is oten perceived as the domain o some o the global economys largest rms such as Boeing, Exxon,

General Electric, IBM, Microsot, Philip Morris, and numerous others. In act, small and medium-

sized businesses are the backbone o the industry.

According to 2007 data rom the U.S. Census Bureau, approximately 177,000 manuacturing establishments have nine

employees or less, and approximately 119,000 establishments have our employees or less. In total, these account or

53 percent and 36 percent o all manuacturing establishments respectively. Another 31 percent (101,000) o manuacturingestablishments have between 10 and 49 employees. Despite perceptions that the global economy belongs to only the

biggest players, these establishments penetrate the global marketplace in many ways. The share o small and medium-sized

manuacturers reporting that exports account or more than one-quarter o their sales more than tripled rom 3.8 percent

during 2001 to 12.8 percent during 2008.15 Tomorrows large companies are likely be built rom todays smaller companies.

Manuacturing Establishment by Size

Number o Employees No. o Mg

Establishments

% o Total

ALL 331.335 100.0%

1-4 119,182 36.0%

5-9 57,779 17.4%

10-19 51,422 15.5%

20-49 50,094 15.1%

50-99 24,359 7.4%

100-249 18,943 5.7%

250-499 6,172 1.9%

500-999 2,384 0.7%

1000 or more 1,020 0.3%


14/44


Are There High Quality Manufacturing Jobs Left in the U.S.?

Employment in manuacturing as a share o total U.S. employment has allen rom about one in three U.S. jobs in 1950 to

about one in ten jobs today. The September 2009 manuacturing employment gure o 11.7 million jobs represents a decline

o nearly 2 million jobs since the recession began in December 2007, a drop o 8 million jobs since peaking in 1979 (19.4million jobs) and is at its lowest level since 1940 (9.8 million jobs).16

Some o the decline can be explained by the way the data is calculated. For example, many unctions previously done

within manuacturing companies and previously counted as manuacturing jobs packaging, transportation, proessional

services, publishing, warehousing are now counted outside o the manuacturing sector as services. Yet much o it can be

accounted or by structural changes in manuacturing, including technological advances, increased productivity and production

eciencies, and globalization.

Despite these job losses manuacturing as an industry accounted

or 18.6 million jobs in 2009 (11.8 direct jobs, and 6.8 indirect jobs

in industries like transportation and warehousing, and proessional,business, and nancial services).17 Manuacturing still has a greater

secondary economic impact (i.e., multiplier eect) than any other

sectoroftheeconomy,withanestimatedadditional$1.40inoutput

fromothersectorsbeinggeneratedforevery$1.00innalsales

o manuactured products.18 Only inormation services; agriculture,

orestry, shing, and hunting; and construction come close at slightly

over$1.00each.Retailtrade($0.58)andwholesaletrade($0.55)

sectors have the lowest impact per dollar o economic activity.

Manuacturing in the U.S. also oers premium jobs. Manuacturers

pay 9 percent higher in wages and benets than the entire economy.

On average, U.S. manuacturing jobs are more likely to provide health,

pension, and other benets compared to other sectors. Employers

ability to pay premium wages to workers is due in large part to their

ability to do more with less - productivity is high, and production and

distribution processes have been streamlined. Declining employment

rates clearly show that this streamlining has included workers.

Unit labor costs o U.S. manuacturers have declined by 40 percent relative to the average unit labor cost o ourteen other

countries that are major competitors in global markets.19

It is no surprise that the skills and education needed by workers in manuacturing have also dramatically shited. In 1973,

over hal o manuacturing production workers had not nished high school. By 2001, only 21 percent lacked a high school

degree. Over the same period, the share o production workers with some post-secondary education rose rom 8 percent to

over 30 percent.20 When non-production workers (i.e. sales, R&D) are included, the high level o skills and education needed

is more evident, with only 12 percent o all manuacturing workers holding less than a high school diploma and over

50 percent having some post-secondary education in 2008.21 Furthermore, 17 percent o all jobs in science and engineering

occupations are ound in the manuacturing sector, behind only the proessional, scientic, and technical services industry.22


15/44


These latter industries include many jobs that

are important to and oten unctionally integrated

within manuacturing, including: engineering,

drating, research and development, industrial

design, computer systems, and environmentaland energy services. In other words, large parts

o the U.S. technology economy may really be

the manuacturing economy.

Very little o the old manuacturing sector -

as typied by long production runs o

standardized parts and products - exists today.

New manuacturing is represented by rms

dependent on constant innovation and adoption

o new technologies that require higher skilled

workers. According to a recent survey o leadingmanuacturers, new product innovation and a high-

skilled, fexible workorce were identied as the

two most important actors to business success.22

Product innovation and a fexible workorce

represent the necessary elements to transition rom

innovation to product development and deployment.

According to the same survey, 51 percent o the

workorce demand in manuacturing is currently

or skilled production workers, 46 percent or scientists and engineers, and only 7 percent or unskilled production workers.

This need or skilled production workers is oten linked with an increased emphasis on science, technology, engineering, and

math related skills. Yet the U.S. lags in math and science scores among young people compared to other advanced economiessuch as Germany, Japan, and the United Kingdom, as well as developing economies such as those in Hungary and Poland.24

This means that it may become more challenging or manuacturers to nd new workers with the appropriate levels o skills

and education, at the same time they are challenged to advance their current workers in a way that encourages innovation in

process, product, and markets. Innovation and a skilled workorce are intrinsically linked.

Can Innovation Alone Rebuild the U.S. Economy?

Many recent papers and reports about manuacturing have emphasized the need to increase ederal investment in basic and

applied research. Data seems to indicate such an increase is warranted. Consider these trends in research and development:25

U.S.researchanddevelopmentexpenditures(inination-adjustedterms)haveincreasedbyonly2.5percentinaverage

annual change over the past our years.


o development.

Source: Bureau o Labor Statistics, Current Population Survey


16/44


Universitiesandcolleges

historically have been the

largest perormers o basic

research in the U.S. and now

account or more than hal(56percent)ofthenations

basic research being

perormed.

Thebusinesssectoraccounts

or the largest share o R&D

spending in the U.S. and

providesmostofthenations

R&D unding, but the business

sectorsshareofR&Dis

decreasing(fromapeakof75percentin2000to

71percentin2006).

ThefederalshareofR&Dspendingrstfellbelow50percentin1979anddroppedtoalowof25percentin2000.

60percentofthefederalR&DbudgetinFY2008isfordefense.Thereisanimportantinnovationrolethatisplayedby

military R&D, particularly as it relates to the technology transer o deense technology into commercial products.

The declining share o ederal spending is one data point in a complex R&D and innovation story. A recent article in the

Harvard Business Review noted that over recent years and past decades the innovation inrastructure that once drove

American ingenuity has slowly dissipated. As low-wage competitor countries become more highly skilled, with more

sophisticated acilities or not only production, but research and development, some manuacturers in the U.S. worry

that our main export is innovation itsel, not innovative products.26

Clearly there are roles to play or the ederal government, business and industry, and higher education in unding and

perorming research and development and in rebuilding and readying the collective industrial commons.27 This industrial

commons is the collective research and development, engineering, and manuacturing capabilities that sustain innovation.

The commons serves as the oundation or innovation and competitiveness that includes R&D know-how, advanced process

development and engineering skills, and manuacturing competencies related to specic technologies. Such resources can

be embedded in a large number o companies and universities as well as the skills, and equipment related to the development

o products through human capital.

Increased ederal investment in R&D alone is not sucient. Nor is the increase o R&D in private companies and universities,

or increased emphasis on science and engineering curriculum in secondary and post-secondary education. It is a combination

o all o these things and more, including but not limited to innovation, multi-rm collaboration, and inrastructure that will

maintaintheU.S.standingastheworldsinnovationleader.


17/44


Can Firms Simply Follow the Market to Stay Competitive?

Markets matter. There is a clear and empirical link between the value o the dollar and the export o goods. As the value

o the dollar increases relative to other currencies, the price o our goods to customers in other nations increases, and thus

they buy less and exports decrease. As the value o the dollar decreases relative to other currencies, the price o our goodsor consumers in other nations decreases, they purchase more, our exports increase, and U.S. goods and services make up a

greater share o the global marketplace.

Given the current state o our global economy, the value o the dollar is expected to decrease. This is good news or

manuacturers as the declining dollar will likely result in an increase in exports. Additionally, to take advantage o this

increased demand or U.S. goods, more goods that might otherwise have been imported will likely be produced domestically

(a classic case o import substitution).

Firms are responsible or driving the market, not just responding to it, and as the

value o the dollar declines, rms must recognize the opportunity to be strategic

and take advantage o the double benet they will ace expanded opportunitiesin export markets and expanded opportunities created by import substitution.

However, opportunities exist to ll market gaps. For example, with the contraction,

restructuring, and impaired capital o the nance sector o the economy, there is a

gap in access to capital or manuacturers.

Many small manuacturers, even those with orders that are relatively healthy,

have been unable to nance growth or execute business and product

diversication plans in the current environment due to the prevailing underwriting

practices, devalued assets, and what seems to be a perceived transitional risk

associated with transorming away rom legacy products and practices and

investing in new products. Many lenders have enhanced this risk aversion in the

current economic climate. However, there are actions that the ederal government

can do to respond to these unusual conditions in the nance markets that are

threatening the manuacturing sector. Current nancial policy eorts operate on the assumption that by decreasing the cost

o capital to banks, banks will thus increase lending activity to small businesses. Decreasing the cost o nancing may create

increased spreads or lenders and make them healthier, but will not necessarily induce them to make any new loans when the

bank cannot sustain loan losses due to its impaired capital or increased regulatory scrutiny.

The eorts unortunately do not address the need to oset rom the lenders perspective nancial deciencies o borrowers

brought about by asset devaluation and what the banks see as transitional risk to cash fows as companies attempt to

diversiy to other products. Access to capital can only be signicantly improved through targeted initiatives that mitigate risk

taking or loan losses by lenders or by some kind o loan enhancement programs which directly reduce specic risks on a loan

by loan basis.


18/44


Market opportunities created by currency fuctuations are a partial solution to the revitalization o the manuacturing sector;

access to capital quite another. Through the course o this paper we promote ederal policy interventions when it can be

helpul, but recognize the need or business to lead the way. The solutions likely lie in the public and private sector working

together in a creative and collaborative eort.

Summary Complex Realities

Manuacturers disagree on the health o their industry - some paint a rosy picture o a leaner, stronger sector than ever

beore, while others warn that the industry is in dire condition. The reality lies somewhere in between. An eective ederal

policy agenda must start with an inormed perspective about the reality o the industry. The reality about manuacturing is

that it is complicated it is not captured in a single data point nor is it captured in a single picture o impending demise

or dramatic revival. But there is a set o realities that apply to the industry broadly. Understanding these realities is critical

to understanding how and why ederal policy action can help shape a more vital industry, and thereore more prosperous

communities.

Consider the ollowing illustrative points:

ManufacturingremainsasignicantpartoftheU.S.economy,generating$1.64trillionworthofgoodsin2008.

I U.S. manuacturing were a country in itsel, it would represent the 8th largest economy in the world. But

Manuacturing is no longer the dominant sector o the U.S. economy but it remains a critically important component.

As o 2008, it represented 12 percent o GDP, down rom nearly 30 percent in the early 1950s.

TheU.S.shareofglobalmanufacturingvalueaddedisholdingsteadyandamongallU.S.exports,manufacturedproducts

dominate, accounting or 57 percent o total value. But.

TheU.S.tradedecitforhigh-techproductsin2007was$54billion,nearlydoublingthe$29billiondecitof2000.

Manufacturingpays9percenthigherinwagesandbenetsthantheoveralleconomy,andnearlyoneinvejobsin

science and engineering are in the manuacturing sector (2nd highest). But

Employment in manuacturing as a share o total U.S. employment has allen rom about one in three jobs in 1950 to

one in ten jobs today.


o development. But

Both the business sectors share o research and development as well as the ederal share are in decline. More than

hal o all basic research in the U.S. is now perormed at universities and colleges.


19/44


Introduction and Purpose

Jerey Immelt o General Electric oers one take on how to re-build a thriving manuacturing sector, providing a set

o guideposts or public policy makers to consider. Other publications list numerous actors such as cost and resource

management, product development, fexibility, service oerings, reliability, decisive leadership, environmental

sustainability, and the ability to look beyond the competitive threat rom other nations such as China.

Rebuilding a strong, sustainable product development and deployment capacity in the U.S.

will require building on what works or rms. Through a literature review o dozens o reports

and studies, and interviews with MEP Advisory Board members (a majority o whom are

manuacturers), the ollowing our interconnected responses to inevitable change emerged. For

each o these, a set o opportunities or action through public policy also came into clear ocus

when viewed within the context o contemporary manuacturing.

The ability o rms to ully embrace each o these our strategies is mixed. In act, a recent studyanalyzed how well Americas manuacturers are prepared to meet the challenges o the new

marketplace.28 The results illustrate that in the ace o a deep recession many manuacturers

struggle just to survive, let alone innovate and grow. Large rms may better understand the need

or change and have more tools to adapt, while small and medium-sized rms oten need help to

identiy and navigate the pathway to success. Even so, small and medium-sized rms tend to be

very agile and once they see their path to success they can be fexible in getting there.

While there are many actors that contribute to a manuacturing rms success, we believe

these our are most critical. A thumbnail sketch o why the characteristic is important and the

challenges that oten prevent manuacturing rms rom being world-class is provided or each.

Characteristics of Successful Manufacturers

We should create an American

Industrial Renewal by moving

on ve ronts: invest in new

technology; win where it counts

in clean energy and aordable

health care; become a countrythat is good at manuacturing and

exports; embrace public-private

partnerships; and promote leaders

who are also good citizens.

Jerey Immelt, CEO o General Electric,excerpted rom July 2009 speech to DetroitEconomic Club29


20/44


Innovate Constantly to Adapt to Economic and Technological Changes

Leading rms continue to innovate their way through economic and technological shocks and disruptions, and even use them

to their advantage. Shocks are generally thought o as external impacts to the rm, such as the current economic conditions,

the rising cost o health care, or rising energy costs. Disruptions tend to be internal to

the rm, such as the deployment o new technologies or processes.

In the context o the current nancial crisis, or example, some businesses are nding

ways to deal with this external shock by managing just-in-time inventory and sub-

contracting the making o tools to be used in the manuacturing process in order to stay

lean and absorb the nancial crunch. Shocks are not always negative, and dependingon the industry they can have wide-scale positive impact. The current administrations

push or energy eciency makes this a good time, or example, to invest in and deploy

energy ecient products and processes. While some manuacturers will see energy

eciency as a disruption to the way they do business, others will manage this change so

that the business comes out in an improved competitive position. Nanotechnology and

Stages o Competitive Manuacturersrom The State o Manuacturing 2009, Enterprise Minnesota

Truly Advanced 5% o employers are aware o the marketplace and are actively engaged in a continual process oimprovement that will enable them to compete anywhere, with anyone, within any economic environment.

Engaged 15% o employers know what they have to do. They have begun the process, sometimes in ts and starts,but are committed to becoming truly advanced.

The top 20 percent consists o truly advanced and engaged manuacturers who:

(a) do not panic in the ace o bad economic news and look or long-term opportunities;

(b) will not be caught fat-ooted by the impending worker imbalance and shortages;

(c) do not ear the growing infuence o China, India, and other low-cost producers; and

(d) do not allow their products to be commoditized by purchasing agents at their OEM customers.

Earliest Stages 50% o employers are in the earliest stages o growth. The upper end o this group really knowsthat they must do certain things to be more engaged, but in general, they struggle to adapt to the vagaries o the

marketplace and the economy, but they end up reacting to changes in their markets on someone elses terms rather than

anticipating them on their own. As you move down this hierarchy, we nd companies that let the urgent dead-lines o

the day-to-day operations get in the way o strategic improvements and longer-term planning.

Disengaged 30% o employers are surviving, but they arent adding the kind o sales growth and protability thatenables them to invest in their businesses to take them into the next generation. They live o o yesterday. In a good

economy they are standing still. And sadly, in this challenging economy, many o them are going to disappear.

I equate growth with

survival. I my company

is not growing, it will

not survive. I Im not

innovating, Im not drivinggrowth.

Mark Rice, President, MaritimeApplied Physics and MEP AdvisoryBoard Member


21/44


3-D simulation are two powerul technologies shaping manuacturing today, but or some rms these represent a signicant

disruption to current products and processes. For strong rms, these disruptions will be turned into opportunities. For others,

the pace o change will be too rapid and will be considered a threat.

Additionally, in a recent survey o over 1,000 manuacturing rms conducted by the NAM, having a well-dened processor innovation was identied as the primary driver o excellence in a disciplined approach to manuacturing.30 This includes

designing structured, standardized processes or generating ideas, developing them, and bringing them to market. Leading

manuacturers believe that process discipline is integral to their success. But this process

must be able to weather and adapt to change. Entire U.S. industries have been unable to

adapt to recent shocks and disruptions caused by the global marketplace and others are

under serious threat. Semiconductors, electronic displays, and advanced materials are just a

ew o several industries with products already lost or under threat o being lost. Appendix A

provides a list o industries and products that all into this category.

There are also strong indicators that more and more U.S. rms are voluntarily sharing

their research, development, design, and patent inormation with oreign countries and

companies as part o business agreements. Recent data rom the National Science Board

indicatesthatin2005,U.S.companieshadconductedover$6billionintradewithunafliated

companies in receipts and payments.31 This consists o U.S. trade in industrial processes,

including patents and trade secrets, used in the production o goods. While this gure

provides an indication o the strength in U.S. research and development capabilities,

our willingness to outsource our nations leadership in research and development

by producing oshore, raises questions about industrial trade and its long-term impacts

on our ability to be innovation leaders.

Throughout industrial history there have been examples o production being sent to nations

with lower production costs. This is good or the economy o other countries and or American consumers due to the lower

cost o the product. However, the U.S. based company is in danger o losing control over its technology; tacit knowledge and

process innovations will not accrue to the original innovating company, and eventually the innovating company will lose the

product. Artul oreign competitors will eventually establish their own brands that will be positioned as the industry leader

in products based on successor technologies. This happened in the color television industry and is occurring again in many

segments o the consumer and electronics industry (see Appendix A).

Finally, the need or rms to consider the green marketplace is expanding. As evidenced in the subsequent section, the nation

is at a tipping point in its conversation about environmentally riendly products and production processes. The green wave

is an example o the need or rms to be ready to adapt to and innovate through change. The next section looks at green as

a process improvement. But it is important to also realize the potential or innovating new products that are environmentally

riendly and help to minimize the impact on the environment. New products that help reduce or alleviate our nations carbon

ootprint will be in great demand in the years to come and present a new market opportunity or the most innovative o

manuacturers.

Responses to Change

by Successul Manuacturers

1. Innovate constantly to adapt toeconomic and technological changes;

2. Embrace green and green lean;

3. Recognize and navigate opportunitiesin the global value chain; and

4. Develop and retain current and uture

talent.


22/44


Embrace Green and Green Lean

When it comes to issues o green and sustainability many manuacturers are aware o the perceived importance but have

yet to make a connection with their balance sheets. Despite the need to nd alternative sources o energy as well as react to

a more environmentally conscious consumer market, many manuacturers have been slow to respond:

Theindustrialsector(includingmining,agriculture,shing,andmanufacturing)accountsfor31percentoftotalU.S.energy

consumption, the largest share o any sector including transportation (28 percent), residential (22 percent), and commercial

(19 percent).33

Manufacturingaccountsfortwo-thirdsoftheindustrialsectorsenergyconsumption.Naturalgasandtraditionalelectricity

accounts or most o the manuacturing sectors energy sources. 34

While47percentofmanufacturersreportedaverageprogressorbettertowardsworld-classgreenandsustainability

measurement benchmarks in a recent survey, only 13 percent described their green measurement systems reviews as

including regular monitoring or transparency.35

Onlyone-thirdofthemanufacturerssurveyedreporthavingmorethanthree-quartersoftheirsalesvolumefromproducts

that are recyclable and/or reusable.36

Yet, even with this apparently slow response on the part o industry, green signals continue to be generated by our political,

economic, and social discourse, particularly given the American Recovery and Reinvestment Acts (ARRA) emphasis on

renewable energy as an economic and workorce driver. This emphasis on green has proven to be complementary to

Green Headlines35(rom State o Green Business, 2009 Greenbiz.com)

GeneralElectricsaiditplanstocutfreshwateruse20percentinabsolutetermsthroughreuseefcienciesinits commercial and manuacturing processes.

Anheuser-Buschannouncedthatitscompanywidewateruseincreased2.4percentoverveyearswhileitsbeverage production climbed about 2 percent. By adopting a number o eciency eorts, the brewer managed

to reduce the amount o water used to make beer and keep its water use fat.

72percentoffacilitymanagerssurveyedbyJohnsonControlssaidtheypaymoreattentiontoenergyefciency,up to 10 percent rom the year beore.

Whenaskedwhattheirnumberoneinitiativewasfor2009nearly40percentofcompaniessurveyedansweredreducing energy use through eciency. In second place: making sure that green stays on the agenda.

Productstewardshipisincreasing.Dellsaiditplannedtoeliminate20millionpoundsofpackagingworldwidewithinthenextfouryears,amoveexpectedtosaveabout$8million.

Hewlett-PackardintroducedanotebookPCinarecycledlaptopbagwith97percentlesspackagingthantypical laptops.

Carbonreductionisbecomingabusinessimperative.CompaniessuchasAlcoaandMerckarejusttwoexampleso those that have variously promised to slash emissions, increase reporting, or adapt a set o climate principles.


23/44


traditional lean concepts deployed by many

competitive manuacturers, and provides

opportunities to marry the two in both

concept and implementation to provide

important production cost savings.

Manuacturers have been embracing the

concept o lean or many years. There

are many variants o the denition but

MEP denes lean manuacturing as the

establishment o a systematic approach to

eliminating waste (such as overproduction)

and creating fow throughout the whole

company. Lean also helps develop and

implement a long-term plan to streamline

operations or success. The benets olean include reduced cycle time, reduced

inventory, reduced work-in-process costs,

increased capacity, improved lead time,

increased productivity, improved quality, and increased prots.

Marrying lean with green process concepts opens up additional opportunities to help improve the balance sheet.

Companies that embrace lean and green production processes are seeking to reduce their environmental impact while

simultaneously increasing their eciency, productivity, and protability. Typically this is being done through reduction

o total energy use, waste sent to landlls, greenhouse gas emissions, and water consumption, among other negative

environmental impacts. This approach aligns with lean concepts to reduce work-in-process costs, increase productivity

and quality, and increase prots.

While some manuacturers remain skeptical o the words sustainability and green, there is a clear indication that eorts

to become more energy ecient and better environmental stewards have reached a tipping point amongst manuacturers.

While many manuacturers understand what needs to be done, many do not and require assistance in the identication and

navigation o the path orward. Oten times, introducing lean green production processes is not done alone but in partnership

with local, state, and ederal government resources, and utilities. E3 (Economy, Energy, and the Environment) is a model that

combines the resources o ve ederal agencies, working with local government and utilities, to enhance sustainability and

competitiveness in local and regional economies and to spur job growth and innovation. Federal and local resources are being

combined to conduct in-depth ront-end assessments and gap analyses o company manuacturing processes, the results

o which are used to develop comprehensive improvement plans on behal o and in collaboration with the participating

communities. The ederal agencies involved in this eort are:

MEP(DepartmentofCommerce)

PollutionPreventionProgram(EnvironmentalProtectionAgency)

IndustrialTechnologiesProgram(DepartmentofEnergy)

Green Suppliers Network

The Green Suppliers Network (GSN) is an innovative collaboration between the

Environmental Protection Agency, MEP, state and local government, and industry that

ocuses on the dual challenge o reducing the negative environmental impact o smalland mid-sized manuacturing suppliers while simultaneously increasing those companies

eciency, productivity, and protability. GSN reviewers employ lean and clean technologies,

which concentrate on the root causes o waste o one process line in a acility and provide

a ramework or achieving specic, measurable, environmental business objectives. Among

other things companies learn to establish systems to use energy more eciently and

improve the use and selection o more environmentally riendly raw materials

(www.greensuppliers.gov).

When American Electric Power (AEP) joined the Green Suppliers Network in 2007, they

had a goal to enlist ve non-uel suppliers to participate in the rst year. By the end o the

year ten suppliers were on board. Doing business with AEP now means that suppliers are

subject to greater scrutiny o their environmental perormance. When AEP issues Requests

or Proposals, suppliers are asked about their environmental practices to determine i theyalign with AEPs vision or sustainability (www.AEP.com/cr).


24/44


EmploymentandTrainingAdministration(DepartmentofLabor)

SmallBusinessDevelopmentCenters(SmallBusinessAdministration)

These agencies work with local partners, utilities, and manuacturers to sustain the manuacturing inrastructure o a region,

make manuacturing plants more energy ecient and cost eective, reduce the environmental impact o participants, and

improve the economy by creating and retaining jobs.

E3 is an example o how the behavior o one rm can positively impact its

community. One rms behavior can also impact the behavior o other rms.

Most manuacturers agree that greening the supply chain is the next evolution

in achieving improved energy eciency. From materials to components to

design, nished product, and end use, many original equipment manuacturers

are requesting that their suppliers adhere to standards o environmental

quality and processes. These include Hewlett-Packard, Nokia, Ericsson, and

Bristol-Myers Squibb. These developments have seen the supply chain adapt

rom one o compliance to OEM environmental mandates to one o using greenlean to create value or lower costs. Suppliers once viewed environmental

quality as something thrust upon them, but are beginning to understand that

by becoming lean and green they are more economically competitive and

thus more likely to survive in a competitive supply chain where all suppliers

are now adhering to environmental quality control. In the new value chain

model o green, socially responsible suppliers will be the most successul. A

signicant challenge over the next several years will be helping more and more

companies make the transition to green lean and ostering growth within the

growing green economy.

Recognize and Navigate Opportunity in the Global Value Chain

Manuacturers think about globalization, oshoring, and the supply chain in dierent ways. Success in the global marketplace

or manuacturers looks dierent depending on the sub-sector and the size o the rm. Appendix B highlights the top import

and export trading partners or the U.S. by high technology sector.

For example, some rms are nding that as expertise develops overseas they have even more reason to send design,

development, and production across the world. Other manuacturers are moving production and design back to the U.S. as

transportation and logistics costs o supply chain management become prohibitive and energy costs continue to increase.

O these, some cite quality concerns or changing their supply chain. For example, Houston-based Farouk Systems is movingall o its production o hand-held appliances rom China to Houston in part to be closer to its customers as well as to better

control quality and inventory and to ght countereiting. Owner Farouk Shami says the Houston-made hair irons will cost

about$2.50morethanthoseproducedinChinabutheplanstoabsorbthecostwithoutraisingtheprice.37 Even the U.S.

military is reconsidering where they get their supplies. In 2003 the U.S. Department o Deense and the National Security

Agency created the trusted sources program to make sure they are buying parts that will not ail because they have been

(intentionally or unintentionally) inected with inerior or countereit parts.38


25/44


Despite these activities there

is not yet a clear link or many

sectors between supply chain

management and the global

value chain. Recent survey datashows that:39

Sixty-eightpercentof

manuacturers rank supply-

chain management and

collaboration as key to their

organizations success over

the next ve years.

Sixty-sixpercentidentify

their organizations progress

towards world-class supply-

chain management and

collaboration as average or better.

Sixty-threepercentdescribetheirend-to-endsupplychainsabilitytorespondtounexpectedcustomerdemandforexisting

products as ecient or real-time.

Sixty-fourpercentratetheimportanceofglobalengagementtotheirorganizationssuccessoverthenextveyearsas

average importance or higher. Forty-six percent rate it as above average importance or higher.

Twenty-vepercentranktheirorganizationsprogresstowardsbecomingaworld-classglobalplayerasgoodorbetter.

OnlyeightpercenthaveincreasedtheirpercentageofdollarvolumeofsalesoutsidetheU.S.byfty-onepercentorhigher;

only twelve percent operate or partner in 6 or more countries outside the U.S.; and only seventeen percent have sales and/

or distribution acilities in 6 or more countries outside the U.S.

According to Dr. Irene Petrick o the Enterprise Inormatics and Integration Center at Penn State University, globalization in

the context o an individual rm can range rom multiple operations in globally distributed locations (global production) to

selling to customers in multiple locations (global sales and distribution) to linkages and collaborations with other rms or

organizations in multiple geographic locations (global supply chains). Dr. Petrick believes that or many small and medium-

sized enterprises (SMEs) the rst option is not easible and the latter two oten conound small suppliers that requently lack

a strategic long-term commitment to globalization. She recommends a niche market approach to globalization where the

SME commits to learning rom mistakes and incorporating that learning into a long-term commitment that can benetsubsequent endeavors.40

Still other manuacturers expect that uture production may be accomplished in many smaller acilities in the U.S. and

abroad to meet environmental concerns and react to local market demands. In this model, manuacturers may produce the

same product in smaller lots in many smaller production acilities that are located closer to the specic markets they serve

The Shit rom Supply Chain to Value Stream

Excerpt rom Supply Chain Globalization, by Dr. Irene Petrick, Manuacturing a Better Future or America, 2009.

OEMs that lead traditional supply chains are now being challenged by networks o rms competing

in a coordinated and collaborative ashion. Companies coordinating their activities in a value stream

tend to be less linearly organized. Interactions between several rms are orchestrated to achieve a

common goal. Thus, communication, collaboration and coordination are not tightly tied to the tiered

structure o a supply chain. This is important or SMEs to understand as they seek to remain relevant.

It suggests new opportunities or interaction with other companies in the network based on adding

value rather than strictly on their position in a tiered arrangement.

Under this emerging structure, the buyer must understand that rst-tier suppliers and customers

are now involved in design, manuacturing, and delivery. Logistics networks are needed to complete

the integrated supply chain management cycle. These linkages were most oten between Tier 1

(suppliers) and OEM rms, but there is increasing evidence that a growing number o OEMs are orming

partnerships with rms deeper in the lower tiers. The OEMs are attracted to companies that possess

unique technical knowledge, process and production expertise.


26/44


(such as China, South America, or the southern U.S.) in order to both meet

environmental and transportation concerns as well as to produce products

that meet local market demands and diering standards or labeling,

saety, and other actors.

Regardless, understanding the complexities o a global value chain can

prove dicult, and no single ormula is right or all rms or sectors, or even

or the same sector over time. During economic disruptions (such as the

current recession) rms oten are out o synch as they try to understand

where dierent parts o a large supply chain may be cutting back or

gearing up. Consider the Lie o a DVD Player supply chain graphic

as an example o a complex, global value chain.

Regardless o whether a manuacturer is becoming more localized or more

globalized, global supply chains remain a key characteristic o todays

manuacturing landscape. This is true or large multi-national rms that

have been negotiating the global marketplace or years and or small rms

with limited global activity.

Making it all work smoothly requires strong relationships, strong

coordination, and a certain amount o risk-taking and trust. The lead

partner in the value chain may not be based on size and revenue but

rather on intellectual property, process innovations, or product innovation.

Or there may not be a lead partner at all, but rather a partnership o

interconnected companies which understands that working better together

will increase the economic competitiveness o all the partners involved.

One way in which manuacturers increase their competitiveness in the

global value chain is to collaborate with others. This may include other

(competitor) businesses, higher education, and government. Collaboration

to increase regional competitiveness o rms is oten reerred to as a

cluster strategy: networks o rms related by common suppliers, shared

markets, labor pools or inrastructure that leverage interactions (including

competition) to their mutual advantage. Manuacturing clusters oten cited are the semi-conductor cluster in the Austin, TX

area or medical devices in Jacksonville, FL or Minneapolis, MN. For manuacturing, the connection backward to raw material

producers and intermediate product suppliers is not a straight line, but involves orchestrating a complex web o nancial

management, transportation and logistics, research and development, adequately skilled labor, appropriate technology, and

domestic and international regulations.

Connecting rms into competitive cluster strategies is an important role played by government, industry associations,

economic development agencies, and others within a state or region. A recent report rom the Center or American Progress

identied the most important characteristics to a successul regional cluster initiative as: (1) a pro-innovation environment

including the presence o research institutions and committed government, and research and business leadership;

National Innovation

Marketplacewww.usainnovation.org

The MEP is connecting manuacturers to

technology and business opportunities

resulting in new markets and new

products that are necessary or success

in the global marketplace. In partnership

with other organizations, the MEP

program is developing the National

Innovation Marketplace (NIM) to acilitate

connections between technology

requestors and potential suppliers.

NIM encourages technology translation

and adaption, and estimates the potential

or business growth. As a clearinghousethe NIM, the MEP, and their network o

partners are acilitating the building o

technology based supplier networks.

Process Equipment Company (PECo) o

Dayton, Ohio participated in the National

Innovation Marketplace to help overcome

its drastically declining auto sector and

layos (one-third o employees in the

last year). Now having been connected

to a patented 3D nanopositioner, PECo

expects to see an annual revenue

increase o over 7%, hire 15 newemployees to handle expansion, and

as one manager said, It could really

put us on the map.


27/44


(2) management and workorce

talent; (3) risk capital and debt

nancing; and (4) a regional

innovation network o similar

companies competingespeciallyin pre-competitive researchand

cooperating with each other.41

An additional challenge or

manuacturers trying to compete

in the global economy is the

increasingly blurry line between

manuacturing and services. Based

on evidence drawn rom over 10,000

rms in 25 dierent countries,

it appears that the majority omanuacturers around the world

are adopting a range o strategies

that make their products more

marketable. These strategies

include, but are not limited to:42

1. Suppliers take on more

responsibility or retail,

distribution, nance, and logistics;

2. Manuacturers attach services

to the product or the benet o

the customer, (e.g. installation,

consultation, and maintenance);

3. Services are incorporated directly

into the product by means o high-

tech methods, such as coupled

product and service (e.g. a

Health Usage Monitoring System);

4. Use-oriented product-service systems where the customer is not the owner o the tangible product; instead

the product, process, or service is shared, pooled, or leased (such as a leased cable modem or a vehicle

painting system that is installed in an OEMs assembly plant but owned and operated by the supplier); and

5. Result-oriented product service systems whereby the product is replaced by a service (such as support sta

or replacing answering machines with voice mail service).

Source: Clarity is Missing Link in Supply Chain, Phred Dovorak, Wa;l Street Journal, 5/18/2009

ExporTech

ExporTechis ocused on helping manuacturers enter or expand into global. Developed as

a pilot by the Maryland District Export Council, Baltimore U.S. Export Assistance Center,

and the Manuacturing Extension Partnership, ExporTech is now deployed nationally

as a collaborative partnership between MEP, U.S. Export Assistance Centers, and state

international trade oces, among others. Participating companies meet or three one-day

sessions over a three-month period, and develop export plans that are vetted by local

experts. As exporting continues to present signicant opportunities or manuacturers and is

receiving signicant support at the ederal and local levels, the MEP Board supports nationalprogram goals to expand ExporTech program into more states in FY2010.

Wilco Machine & Fab is a manuacturer (located in Marlow, Oklahoma) o abricated and

machined equipment, products, and tools or the energy industry. In 2009 exports accounted

or less than 8% o their total revenue. Following their participation in ExporTech, halway

through 2009 Wilcos exports had jumped to 51% o its revenue and were expected to reach

60% o total revenue by the end o 2009.


28/44


This hybrid o products and services within manuacturing clearly indicates a new level o sophistication and complexity

and requires that manuacturers understand the value-add demanded by consumers related to service oerings. It also

requires the know-how to manage costs and timescales related to developing and executing non-standardized contracts

or establishing long-term relationships with suppliers.

Develop and Retain Current and Future Talent

Despite the economic downturn and

a perceived lack o jobs, data rom a

May 2009 survey o manuacturers

indicates that skills shortages still

exist, especially or the most protable

companies and or skilled production

workers, scientists, and engineers.

The survey also identied that having

a highly skilled, fexible workorce

remains critical to business success

and that new product innovation

is now seen as the most important

driver o business success, which

also requires a highly skilled, fexible

workorce.43

Anecdotal evidence suggests the lack o skilled workers extends beyond engineers and scientists to all levels o a

manuacturing enterprise. The job o machinists and welders is now more dependent on a strong base o knowledge and

skills than ever beore. There is a shortage o appropriately skilled workers at nearly all levels o manuacturing, and major

challenges to be overcome. In addition to concern over the declining percentage o students in U.S. universities studying

science and engineering, the most recent skills gap report released by the NAM identied additional workorce challenges

including: the exodus o Baby Boomers rom the workorce with substantial accumulated skills; changing job requirements,

necessitating some level o technical skill in almost all jobs and making truly unskilled jobs a thing o

aa manufacturing 2010 mep advisory report 4 24l

Documents