A report released by The National Association of Manufacturers (NAM) and The Manufacturing Institute (TMI) reveals important information about small and midsized manufacturers for supply chain executives. The report shows that these companies are vital to the future of America's economy by leading innovation and productivity. For small and midsized companies, and their supply-chain partners, the report offers insight on how to compete in the global marketplace.
The NAM/TMI report, "The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues," was sponsored by RSM McGladrey, the leading professional services provider to small and midsized companies.
NAM defines small manufacturers as companies with fewer than 500 employees and midsized manufacturers as those with fewer than 2,500. Together, small and midsized companies represent more than 99 percent of the nation's manufacturers. These companies account for 40 percent of the value of U.S. production and 60 percent of manufacturing employment.
Small and midsized manufacturers now compete in a dynamic global marketplace, where the role of each link in the supply chain is critical. Companies must have an effective understanding and utilization of supply chain management to achieve their business objectives.
Supply Chain Management and Manufacturing Innovation
Despite advances by growing economies such as China and India, the United States is still the world's leader in manufacturing innovation and technology. America's manufacturers have suffered a profit squeeze as foreign competitors continue to drive down world prices and structural costs continue to increase. However, the nation established its leadership position in manufacturing by utilizing the latest technology and design techniques to develop products, and small and midsized companies continue to prioritize innovation as a strategy to remain competitive among international manufacturers.
Small businesses average more than twice as many innovations per employee as larger corporations. The new products and processes developed in manufacturing contribute significantly to U.S. competitiveness, economic leadership and the current high standard of living. Small and midsized companies face a much higher risk factor as well. An estimated 10 percent of small businesses fold each year. Therefore, manufacturers must develop a business plan that preserves the inventive spirit that distinguishes them from competitors — but do so without sacrificing profit margins.
A supply chain that adapts to changing market demands enables manufacturers to focus on developing core strengths rather than on areas such as logistics and inventory. In addition to innovation, the report identifies flexibility, speed to market and proximity to customers as practices that are key to the success of small and midsized manufacturers.
Another key observation in the report for supply chain managers is the increase in small and midsized manufacturers that are now exporting. More than 62,000 small and midsized manufacturers export. Although the number of these manufacturers that are exporting has increased, many are still not fully exploring this opportunity. Ninety-five percent of manufacturers that export are small and midsized companies, but they account for just 15 percent of U.S. exports of manufactured goods.
When most manufacturing businesses start up, they concentrate sales efforts in known markets based on current users and supply chain partners. As they grow, they often overlook profitable sales opportunities outside the United States. Many companies are now broadening their scope of business by recognizing the growth potential that exists in exporting.
A logical reason to export as part of a business strategy is additional sales opportunity, exposing the company to the competitive pressure of world markets and motivation to manufacture products that can be used internationally. Also, recent studies have shown that exporters — small and large — pay higher wages, enjoy higher productivity and have stronger staying power than similar companies that do not export.
Exporting can be a lucrative business practice on a global scale if the company's supply chain is properly managed. Manufacturers can often identify supply chain partners in developing markets across the world to assist in exporting.
Trends in Manufacturing Employment
Small and midsized manufacturers, as well as other companies in the supply chain, struggle to communicate the desirable employment opportunities in the industry. Public perception is still catching up with the manufacturing revolution that combines technology and enlightened management philosophies, including flatter organizational structures, more delegation and empowerment, and the blurring of distinction between blue-collar and white-collar jobs.
Top job candidates are looking for more than a paycheck. Small and midsized manufacturing management has to evolve with the times by developing new leadership skills and cultivating a corporate culture desirable for today's workers. Qualified employees are looking for autonomy, involvement in decision-making and transferable skills and experiences that will make them valuable to the market as well as to their current employers.
Working in manufacturing today requires a diverse skill set, including an understanding of computer hardware and software, analytical skills, decision-making capabilities and strong interpersonal abilities. Recruiting young employees who possess these skills is essential to replace workers from the baby boom generation, who are beginning to retire. NAM estimates that baby boomer retirements will peak in 2012 and there will be 10 million unfilled positions by 2020.
Small and midsized manufacturers and supply chain partners need to review a few important measures to determine the health of the business, known as key performance indicators (KPIs). The KPI concept was developed by Robert S. Kaplan and David P. Norton, who divide KPIs into four categories:
- The financial perspective
- The customer perspective
- The innovation and learning perspective
- The internal business perspective
It is important to develop KPIs that measure the fundamental factors driving the viability and success of the business. Companies should identify three to five KPIs to focus on the critical components of their business. For example, the CEO of a midsized manufacturer might have KPIs of sales growth, manufacturing costs, certain production process times, on-time delivery and results of customer surveys.
Because the supply chain's effectiveness is contingent on the success of each company's specialized policies and procedures, creating benchmarks to evaluate processes is crucial. Supply chain executives should prioritize performance measurement and communicate its importance to all levels of the company.
Public Policy Issues and Manufacturers
The central message of the NAM/TMI report is to empower small and midsized manufacturers to distinguish themselves to achieve a competitive advantage. However, some challenges faced by companies are influenced at least partly through enactment or reform of legislation and regulations. Examples of current policy issues affecting manufacturers — and therefore the entire supply chain — relate to regulatory improvement, energy legislation, international trade, taxes, health care reform and federal funding for research. It is important for company leaders to stay informed on legislation that affects their business and express opinions to the appropriate political officials.
Because many small and midsized manufacturers are exporting, it is important for supply chain partners to be especially aware of public policy issues that affect international trade. The supply chain is expanding far beyond U.S. borders, and reform of certain legislation and regulations will shape the future of the global marketplace.
Best Practices: Strategies for Success
The NAM/TMI report outlines 15 best practices followed by leading small and midsized manufacturers. These guiding principles help companies manage risk without compromising innovation, as they face continuously changing customer demands, skilled worker shortages, evolving technologies and limited internal resources.
The best practices below include several of the topics we have explored in the article that are critical to a company's success in today's global market.
1. Stay in touch with customers, talk to them about their needs and look to them for new product ideas.
2. Differentiate products and services to better define and develop a competitive advantage.
3. Devote the necessary time and energy to marketing; develop a distinctive product and marketing strategy; expand and diversify your customer base.
4. Go global. Develop export markets.
5. Ensure that your activity-based cost system is helping your company contain cost increases, focus on which activities are consuming the most resources and highlight non-value added activities.
6. Look for a long-term relationship with a banker who is willing to take the time and effort to understand your company.
7. Invest at least 3 percent of your payroll in employee training; get involved with Workforce Investment Boards (WIBs), government-sponsored training programs and local educational institutions such as community colleges that offer training in manufacturing skills.
8. Explore how experts from a Manufacturing Extension Partnership (MEP) center can help you with your business.9. Appoint a majority of outsiders with relevant and diversified business experience to your board of directors or board of advisers; look to those outside directors or advisers for opinions and advice; welcome their challenge.
10. Develop a plan for management succession. Start estate planning early and continually keep abreast of estate tax laws and regulations.
11. Monitor your company's viability and competitiveness on a daily, weekly and monthly basis with a set of key performance indicators (KPIs) tailored to your company's particular business challenges.
12. Weigh both quantitative and qualitative factors in making capital investment decisions. Strike a balance between staying on top of technology and making investments you can't afford; no company has unlimited resources.
13. Constantly look for opportunities to delegate, to empower your employees at all levels and to create the corporate culture for a high-performance workplace.
14. Speak out to your government representatives at the federal, state and local levels.
15. Stay abreast of legislative, regulatory and policy developments through the general media, business publications, and industry, trade and professional organizations such as the NAM (www.nam.org.).
For a full-text PDF file of the report or more information, please visit www.rsmmcgladrey.com.
About the Author: Tom Murphy, is executive vice president of manufacturing and wholesale distribution at RSM McGladrey — the fifth largest accounting, tax and consulting firm in the United States. For more information, visit www.rsmmcgladrey.com.