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New Directions in Manufacturing: Report of a Workshop 2 Challenges Facing U.S. Manufacturing Today The U.S. economy faces major challenges to rebuild and retain the nation’s manufacturing capacity, jobs, and innovative edge in a global, virtual market economy. Several central questions arose during the course of workshop discussions on these challenges: How can we ensure that the discussion of manufacturing issues takes place using accurate and useful metrics in the correct context? How do we effectively exploit manufacturing globalization for the mutual benefit of employees, companies, consumers, and society, both here and abroad? How can the manufacturing enterprise effectively exploit the opportunities presented by new technologies, especially information technology? How can we maintain the pace of innovation, to create new jobs for those displaced by changes in the manufacturing enterprise? How can we ensure that small and medium-sized manufacturers remain strong and competitive? How can we maintain a sufficient talent pool and adequately skilled manufacturing workers? How can manufacturing enterprises tackle the rising costs of health care, regulation, and litigation? In short, the workshop addressed these indicators of how manufacturers can reduce the risks associated with operating in the United States. UNDERSTANDING THE ROLE OF MANUFACTURING Manufacturing is a word that means many things to many people. To ensure that the discussion of manufacturing issues, and the basis it sets for decisions and policies at the federal, state, and local levels, is meaningful, it is critical to understand and use the appropriate metrics in the correct context. Metrics Manufacturing is measured in a number of ways and can be described with a large array of statistics and analyses. These metrics range from the amount and type of goods produced, to a detailed breakdown of the people who contribute to this production, to the economic impact of both. Many workshop participants came away from the workshop distrusting the metrics currently being used in the national debate on the status of the U.S. manufacturing sector. Over the past 65 years, various federal agencies have been gathering data on industrial sectors to calculate such indicators as manufacturing’s percentage of the gross domestic product (GDP); the level of manufacturing orders; industrial production and capacity utilization; labor productivity; income and compensation; and energy production and prices. However, both
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New Directions in Manufacturing: Report of a Workshop the measurement strategy and the information being measured have changed over time, and this complicates the interpretation and understanding of the information. Whereas some trends are easily seen in retrospect, it is unclear whether or not the measures currently in use accurately reflect the state of the overall economy or the manufacturing sector and the trends that are developing. Because such metrics are routinely used as the basis for federal policies and legislation, it is very important that the measures be well understood in order for them to be useful. For example, measuring direct employment in the manufacturing sector may be misleading. A decrease in employment might indicate a loss of manufacturing production capacity in the United States; however, it might also reflect an increase in productivity, and production might actually be increasing. Such a decrease in employment numbers may also indicate that some jobs once counted as manufacturing (security guards or payroll clerks, for example) may today be outsourced by the manufacturing company and are now counted in the service sector. Many conclude that all three trends are at work, but today’s data are viewed as inadequate to determine their relative importance. In addition, no metrics today look at such factors as wealth generation from manufacturing, for example, which could help policy makers understand the true impact of changes in the manufacturing sector. Further, the changing operating models in the manufacturing sector make it an interesting challenge to find accurate and useful metrics. Goods are produced in a variety of ways: some are used as raw materials, others with added value from processing techniques, and some as finished products sold to an end user. These different types of products are all tracked by federal agencies, and their levels of production are quantified in systems that are sometimes similar and sometimes orthogonal. In addition, tracking of products is complicated by the fact that the components of a single product may come from a variety of sources and may be processed several times. Each processing step may happen at a different company and/or location, either in the United States or abroad. As productivity increases, our standard of living could increase even as direct manufacturing employment decreases. As manufacturing grows in the developing world, markets are growing as well. Although it is easy to speculate that these changes will be reflected in the measures the U.S. government gathers and uses, it is difficult to ascertain the extent or dimension of the changes. An additional complication arises because of the growing interdependence between manufacturing and service jobs: The continued loss of manufacturing jobs could have a direct relationship to a corresponding loss of service sector jobs. Context Historically, much of the discussion and measurement of manufacturing elements have been in the context of factory floor activities. Also referred to as “little m” manufacturing, this facet is concerned with direct production, or the cutting, grinding, fabrication, and assembling of materials. In a larger context, “big M” manufacturing expands this scope to include many of the decisions, processes, and activities that occur both upstream and downstream of factory floor activities. “Big M” manufacturing includes areas such as e-business, product design, process development, supply chain management, plant design, capacity management, product distribution, product costing, performance measurement, plant scheduling, quality management, workforce organization, equipment maintenance, strategic planning, and interplant coordination, as well as direct production. The current national debate on manufacturing is sometimes narrowly focused on little m manufacturing. However, all manufacturing organizations must attend not only to little m
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New Directions in Manufacturing: Report of a Workshop concerns, such as direct production, but also to big M concerns. Commercial viability and profitability are the main drivers for manufacturing, most of which is managed by for-profit business organizations. Any government actions intended to help the manufacturing sector must also clearly pay attention to both the broad and narrow contexts. Because of the importance of manufactured goods to all aspects of American life, a broader view of manufacturing must be considered in any policy decisions. Manufacturing is a means of satisfying higher societal objectives, and the current state of “making things” should therefore be placed in a larger societal context and should form the basis for effective government action. Many workshop participants felt that a discussion at the national level that included such a broad view was needed. DRIVERS FOR MANUFACTURERS Globalization Globalization is evident in almost every aspect of manufacturing everywhere. In the past, a company may have bought supplies and sold its products only locally or regionally; today, global supply chains and global markets are a reality for most U.S. manufacturers. To be successful in this evolving climate, manufacturers must find ways to exploit the advantages of globalization of production and expansion of world markets in such a way as to benefit everyone, including employees, companies, consumers, and society as a whole. A portion of the perceived decline in manufacturing in the United States can be attributed to the decisions of firms to move some production operations overseas. Many factors contribute to such a decision. First, wages and employee benefits are much lower in a number of other countries. These places may also have lower costs for insurance and taxes. It is possible as well that they may also have lower costs for energy, for compliance with environmental or efficiency regulations, or for legal liability. In addition to these cost considerations, the quality of goods produced in the developing world is increasing rapidly. In many cases, plants being built in developing countries utilize the newest technologies, whereas existing plants in the United States do not. Older and established facilities must recover capital costs incurred years or sometimes decades in the past and so cannot always be as up to date as a new factory. Personnel around the world now have access to the education and training needed to work with these new technologies. Finally, the transportation and communication infrastructure needed to support manufacturing may also be brand-new and utilize more modern technology than that in much of the United States. A common perception has been that transportation costs will limit globalization. For high-tech manufacturing products, however, transportation costs can be a small percentage of the total cost of product realization and delivery. Moreover, business models demonstrate that global production and transportation can be cost-effective even for such commodities as gravel or coal, with very low prices per ton. Corporations may also find that globalized production can enable the efficient distribution of engineering and manufacturing responsibilities, with the retention of intellectual property. The world economy in the second half of the last century has become increasingly global, with a vast expansion of trade in goods and assets and increased interdependence among trading nations. The United States has been much involved in this process, both as a leader in securing successive rounds of trade liberalization and as an active participant in world trade.
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New Directions in Manufacturing: Report of a Workshop Information Technology The proliferation of information systems, modern management practices, virtual enterprises, and outsourced activities all add to the complexity of modern manufacturing systems. For a manufacturing enterprise to be successful, it is important to understand and control data, information, and knowledge. Manufacturers must find ways to exploit the continuing opportunities presented by new information technologies. Information, data communication, and data processing technologies are powerful tools that can be used in every element of the manufacturing enterprise, including just-in-time delivery of raw materials; activities on the factory floor; shipping; marketing; and strategic planning. These tools can manipulate, organize, transmit, and store different types of information in digital form. The impact of these technologies has been compared to that of the technological advances that spurred the Industrial Revolution. The importance of information technology in little m manufacturing is largely the result of the digitization of automation and feedback control systems that was introduced as early as the 1930s. Digitization of manufacturing operations on a scale sufficiently large to make a difference was made possible by the advent of miniaturized semiconductor electronic components. In particular, it was made possible by the ability to package large numbers of electronic circuits into tiny semiconductor devices (microprocessors) at low cost. These advances played a critical role in the productivity gains in manufacturing, especially during the 1990s. Today, almost all process and metal-forming manufacturing industries are highly dependent on control devices and machinery and utilize advanced digital networking to link operations internally and with suppliers and customers. The Internet has amplified, extended, and added its own characteristics to the transformation in both little m and big M manufacturing. Internet-based technologies offer a ubiquitous and economical way of transferring information, and the benefits of networked production now clearly outweigh the cost of the technology investment, even for most small and medium enterprises. Key technologies for the future of manufacturing include interoperability/interoperability standards; pervasive and adaptive process control; advanced learning technology; global collaborative capabilities; enterprise-wide supply network management; knowledge management and navigation tools; security and other protection systems; modeling and simulation technology; wireless and remote communication; software to enhance moving from ideas to products; and the incorporation of intelligence into processes and products. The combination of information technology and increasing globalization has the potential to foster widespread outsourcing of manufacturing activities. In some cases, this trend has reduced the domestic content of U.S. manufacturing, and has had significant implications for manufacturing jobs and labor markets. This growing reliance of manufacturing and other economic sectors on information and communications technology has also spawned completely new industrial sectors—and occupations—devoted to the production and implementation of these systems in many industrial sectors. Products and Productivity Advances in technology have been a boon to our nation by enabling new manufactured products and new manufacturing processes. New products have improved our quality of life and the health of our bodies and our environment and have contributed to our national security. Improved productivity in manufacturing as well as in design and other supporting activities can open up new markets by making products more affordable.
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New Directions in Manufacturing: Report of a Workshop Increases in productivity can also mean that fewer jobs are needed to produce what can be consumed by the U.S. economy. Companies can deal with this in a number of ways. One manufacturer might choose to expand operations to new products that allow it to maintain historic levels of employment; another might open a new plant to take advantage of available workers. An obvious solution that many U.S. manufacturers have relied on is to export their products to new and larger world markets. In doing so, many U.S. companies have discovered market growth opportunities in the same regions that supply low-cost labor. For example, some companies moved their manufacturing operations to China because they were concentrating on low cost. But China is one of the largest markets in the world, with over 1 billion potential consumers. Producing a product in China can increase the probability of successfully selling it to the consumers and industries in that area. Adding to the complexity is the emergence of a new class of companies that provide third-party manufacturing capability. These contract manufacturers have been joined by firms that engage in product design, engineering, shipping, and repairs on a contract basis in addition to manufacturing. As the trend toward outsourcing continues, it becomes much harder to identify where manufacturing is performed and who is performing it. Companies often are not consciously deciding where to manufacture but leave this up to the contract manufacturing service company. If manufacturing cannot provide a distinctive competitive advantage to an enterprise, that enterprise may choose to channel its resources into those functions and activities that give it a competitive advantage. DILEMMAS FOR MANUFACTURERS The complex interplay of productivity increases, domestic market limitations, technological change, and trade policies appears to be fostering overseas outsourcing of U.S. manufacturing capacity and jobs. A number of workshop participants expressed concern about the current extent of international outsourcing, its growth over the past two decades, and the economic and employment implications. The committee observed growing concern about how globalization is affecting the industrial base for national defense and homeland security. Workshop participants identified the desire to retain and create new high-skill, high-wage U.S. jobs in manufacturing and in the services that support manufacturing. This will clearly be difficult in the face of global market pressures on U.S. companies to outsource and move manufacturing facilities to low-cost, low-wage locations. In addition, they identified the challenge of balancing (1) the need to preserve strategic manufacturing and technological capacity domestically, for materials, components, and products critical to homeland security and national defense, with (2) the perceived cost advantages associated with globalization and the increasingly virtual nature of manufacturing supply chains. The Jobs Factor Many labor organizations associate movement of production overseas with the loss of manufacturing jobs in the United States. This aspect of globalization is the bane of workers and communities who see their jobs migrating to foreign locations where lower standards of living and poor working conditions undercut U.S. workers’ jobs. A counterargument is that by manufacturing products cost effectively, these corporations retain their market share and thereby retain the ability to employ workers in the United States. However, these trends in employment are becoming more difficult to observe and measure because of changing business models.
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New Directions in Manufacturing: Report of a Workshop Demands for Innovation The sustainability of growth in the U.S. manufacturing sector has been based on the ability of the United States to innovate, and this trend will likely continue. In order to create new industries and jobs, manufacturers in the United States must preserve and strengthen technological innovation and engineering design capabilities. When the production in one plant or one industry moves out of the United States, displaced workers must be able to shift to new occupations requiring new skills and abilities. History has shown that this shift can be either detrimental or beneficial to workers, with the most important determinant of benefit being the presence of innovative new industries that create high value for their markets. Transitional resources must also be available from the government and private sector to help communities rebound from economic dislocation. In addition, the growing demand for products with improved quality, functionality, and time to market puts an enormous strain on established production processes. Advances in technology can provide ideas for new products. For example, moving to precision manufacturing of components using revolutionary nanomanufacturing processes could stimulate the invention of new products. Biotechnology and nanotechnology are emerging fields that may be able to boost the U.S. economy as other industries have done in the past. Research and Development To thrive in competitive markets, manufacturers must innovate, and innovation often relies on research and new technologies. The increases in productivity over the past 50 years have been the result of heavy investment in research and development by the manufacturing sector. Between 1983 and 1997, the ratio of industry-funded research and development to sales for all manufacturing increased from 2.6 to 3.3 percent.1 Reduced profits, however, often because of the recession, have led most companies to decrease their investments in research and development. The federal government’s support of the research and development infrastructure, through investment in long-term, high-risk research, is critical to the health and vitality of the U.S. economy’s technology engine. The committee noted broad support among the workshop participants for collaborative manufacturing programs such as the Advanced Technology Program (ATP)2 and the Intelligent Manufacturing Systems (IMS)3 program. Unfortunately, the federal commitment to the research infrastructure has been slowly eroding4 To encourage innovation in the U.S. manufacturing sector, greater emphasis can be placed on development, which may occur at the expense of basic research. Few organizations are willing to bear the risk of development, and even fewer mechanisms are designed to encourage it. Investment in basic research is squandered, however, without sufficient development funding to balance the research portfolio. The federal government can help create innovation in the manufacturing sector by establishing policies that encourage basic science and, at the same time, implement programs that share the risk of development with the private sector. The Department of Defense has had 1 National Science Foundation, National Science Board. 1998. Science and technology indicators. Available at http://www.nsf.gov/sbe/srs/seind98/frames.htm. Accessed November 2003. 2 Department of Commerce, Advanced Technology Program. Available at http://www.atp.nist.gov. Accessed November 2003. 3 Intelligent Manufacturing Systems. Available at http://www.ims.org. Accessed November 2003. 4 National Science Foundation, National Science Board. 1998. Science and technology indicators. Available at http://www.nsf.gov/sbe/srs/seind98/frames.htm. Accessed November 2003.
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New Directions in Manufacturing: Report of a Workshop an admirable track record of technology development, with a roughly equal ratio of research to exploratory development. The federal government may be able to improve innovation by encouraging all agencies that fund research to achieve the same 50:50 research to development funding ratio. Implementing Standards Standards are part of the technical infrastructure that underpins all aspects of manufacturing, including innovation. Effective standards for research, production, and product development can enable a vigorous and sustainable future for manufacturing. In specifying characteristics or performance levels, standards promote efficiency in domestic and international markets. Although the implementation of new standards always incurs cost, by adhering to agreed-upon standards, businesses can negotiate according to widely accepted criteria for products or services. Every aspect of manufacturing depends on standards. Measurement standards establish criteria for accuracy, precision, and efficiency in documenting and specifying, for example, the dimensions of screw threads, the diameter of optical fibers, the content of steel alloys, information technology interfaces, electromagnetic compatibility requirements, and the performance of machine tools or robots. New transaction standards, including those for configuration documentation, quality processes, and now identification cards, are becoming more pervasive and better integrated. And finally, international standards of practice encompass a wide variety of processes from labor relations to health and safety, from anti-tampering warranties to cost accounting, and from energy efficiency to environmental stewardship. Participation by the United States in the development of international standards is essential for the continued success of the U.S. manufacturing sector. The better the underlying foundation is and the more effectively it is used in research, production, and the marketplace, the brighter are the nation’s prospects for maintaining a vigorous manufacturing sector and for sustaining U.S. leadership in high technology. Rising Infrastructure Costs Finally, rising health-care, legal, and regulatory costs are affecting all sectors of the economy. Rising insurance costs could force many small manufacturers to cut back on technology investment.5 No other single issue was given as much attention at the workshop by both employee and employer representatives as the subject of health-care costs, which rose an average of 10 percent in 2003.6 Many manufacturers, large and small, are having an increasingly difficult time affording coverage of employee health-care benefits. In many instances employers are passing on these higher costs to their employees—and in some cases, eliminating such coverage altogether. Absorbing these costs can impact a company’s ability to compete with overseas firms that aren’t required to provide the same level of health care. While a company may pay indirectly for health-care costs under other social welfare systems, removing this charge from direct billing represents a lower risk for an employer. For example, an employer would not have to negotiate rates, nor would it be susceptible to radical changes in rates from year to year. 5 C. Wilkerson. 2001. Trends in Rural Manufacturing. Available at http://www.kc.frb.org/RuralCenter/mainstreet/MSE_1201.pdf. Accessed November 2003. 6 J. Appleby. 2003. Workers bear brunt of rising health care in ’03. Available at http://www.usatoday.com/money/industries/health/2003-12-07-healthcosts_x.htm. Accessed November 2003.
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New Directions in Manufacturing: Report of a Workshop Although every manufacturer wants to be environmentally responsible, without careful attention to synergies, economic development can occur to the detriment of environmental health. On the other hand, poorly planned environmental regulations can also adversely impact development. At the same time, the high cost of compliance with regulations and protection against litigation are undercutting business competitiveness. In 2002, the combined regulatory and legal burden cost U.S. firms $697 billion, or 6.7 percent of the GDP. Manufacturers are especially hard hit by these burdens. The cost of regulatory compliance alone adds up to $8,000 per manufacturing employee, 67 percent higher than the average cost per employee of businesses overall.7 The costs of regulatory compliance are tremendously important, and the differentials in regulatory standards, enforcement, and compliance around the world are a matter of much debate. THE CHANGING NATURE OF MANUFACTURING JOBS Flexible and pervasive educational and training systems are necessary to ensure that an adequate talent pool exists for manufacturing jobs, as well as to ensure that workers already on the job continue to be educated. By offering continuing education for manufacturing workers, direct product and process innovation is improved and workers are prepared for future industries. Shortages of Skilled Worker The need for highly skilled workers in the manufacturing sector persists despite the loss of U.S. manufacturing jobs, and a shortage is predicted as early as 2010. This projected shortfall in the skilled-labor force can be attributed to the retirement of skilled workers, the interaction of demographics and technology, and the failure of the educational system to keep up with the needs of manufacturing. In a recent survey of manufacturers, more than 80 percent of respondents reported a moderate to serious shortage of qualified job applicants.8 Two-thirds of the firms surveyed reported that their most serious workforce shortages were in production areas, ranging from entry-level workers, operators, machinists, and craft workers to technicians and engineers. The major areas of concern have shifted from specific technology skills back to the fundamentals, with basic employability skills cited as the number one deficiency for both current hourly workers and applicants for hourly positions. These skill deficiencies have impaired manufacturers’ ability to maintain production levels, implement new productivity improvements, or deploy quality initiatives. In fact, some manufacturers stated at the workshop that they could not accept new orders because they lacked the workers to produce their products. Today’s manufacturing jobs require more and more technological literacy, and employees at all levels must have the wide range of skills required to respond to the demands of an increasingly complex work environment.9 Manufacturing is perceived by many to be “dangerous, dark, dirty, and dead-end.”10 On the contrary, most modern manufacturing facilities are light, clean, airy, pleasant, and safe places to work. In addition, since the 1970s, workplace 7 Thomas Hopkins and Mark Crain. 2001. The impact of regulatory costs on small firms. NTIS #PB2001 107067, U.S. Washington, D.C.: Small Business Administration. Available at http://www.sba.gov/ADVO/research/. Accessed November 2003. 8 National Association of Manufacturers. 2001. The skills gap 2001. Available at http://www.nam.org/tertiary.asp?TrackID=&CategoryID=958&DocumentID=24443. Accessed November 2003. 9 National Research Council. 2002. Technically Speaking: Why All Americans Need to Know More About Technology. Washington, D.C.: National Academies Press. 10 Stated at a roundtable of the Small Business Committee of the U.S. House of Representatives. October 28, 2003.
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New Directions in Manufacturing: Report of a Workshop fatalities have been cut by 62 percent and occupational injury and illness rates have declined 40 percent; and at the same time, U.S. employment has doubled and now includes nearly 100 million workers at 7 million sites.11 Manufacturing companies employ professionals and skilled and semi-skilled workers from many different fields: graphic designers, sales executives, physicians, scientists, lawyers, and marketing managers. These employees are well compensated, with the average manufacturing worker earning $46,000 per year in wages and an average total compensation package of $54,000 in 2000. Both of these figures are more than 20 percent higher than comparative averages for all U.S. workers. In addition, more than 80 percent of manufacturing workers received direct health-care coverage through their employers in 2001.12 Education Essential for Innovation Most of the innovation that results in new industries is based on the combination of new technology and market needs. Technology can be defined as the practical embodiment of knowledge—the useful application of basic science. Thus, in order to create new technological innovations, the manufacturing workforce must understand existing technology. Education is a lifelong process, and employees without adequate technical knowledge are unable to achieve continuous improvement. Workforce Development Programs The committee found substantial support among the workshop participants for various workforce development programs, including training partnerships (many involving labor-management collaboration), and for more federal and state resources for such programs. Making services accessible to employers is important. One federal program that provides funds for training is the Workforce Investment Act, administered by the U.S. Department of Labor. Communities can pool resources from multiple organizations to holistically address the needs of manufacturers. Participants at the local and regional levels include workforce and economic development agencies and organizations, local Chambers of Commerce, community colleges and private education providers, literacy councils, state and local chapters of business and industry associations, local manufacturing extension centers, small business development centers, and organizations promoting entrepreneurship. Small and Medium-Sized Manufacturers Small and medium-sized manufacturers, generally firms with fewer than 500 employees, are an important sector of the U.S. economy. Small firms are important for a variety of reasons; for example, they produce more frequently cited patents than large firms, on average. Although their share of patents is similar to their share of manufacturing employment, the patents of smaller firms are twice as likely as large-firm patents to be among the 1 percent most cited. This suggests that small-firm patents are, on average, more technically important than large-firm patents.13 Small and medium-sized manufacturers provide the primary supplier base for large 11 Department of Labor. Occupational Safety and Health Administration. All About OSHA. Available at http://www.osha.gov/Publications/osha2056.pdf. Accessed November 2003. 12 Department of Labor, Bureau of Labor Statistics. 2003. Current employment statistics. Available at http://www.bls.gov/data. Accessed November 2003. 13 CHI Research, Inc. 2003. Small serial innovators: The small firm contribution to technical change. Available at http://www.sba.gov/advo/research/rs225tot.pdf. Accessed November 2003.
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New Directions in Manufacturing: Report of a Workshop domestic manufacturers. This has been the result of a 30-year trend of outsourcing by large automotive, aerospace, and heavy equipment manufacturers. Since the early 1980s, manufacturing employment has become increasingly concentrated in smaller plants and decreasingly concentrated in larger companies. The number of manufacturing plants with fewer than 500 employees in the United States fell in 2000 and 2001 for the first time since 1978.14 The influence of this small-manufacturer segment is exemplified by the fact that in large manufacturing plants that have experimented with a variety of ways to empower employees, it is routine today for small work units to operate independently within a larger plant. In other words, large firms are trying to emulate the productivity factors of small firms, which are perceived as being better. Small and medium-sized manufacturers face specific issues, including a small client base and a greater dependence on revenue from each client; small management teams; limited access to capital for improvements; and difficulties in providing service overseas. In order for these enterprises to prosper, increased integration of their supply chain is important, as is easier access to technology and capital. The manufacturing sector needs to find a way to modernize and strengthen small and medium-sized manufacturing enterprises. Support from federal and state governments can be very effective, and the committee noted broad support for the Manufacturing Extension Partnership program. It is key that this type of support be sustained and that it be coordinated among the stakeholders: employers, educators, students, and government leaders. RISK The bottom line for many manufacturers today is risk. Decisions on manufacturing domestically or overseas, to adopt innovations or evolutionary improvements, or to hire and train new workers or to invest in more productive technology are all based on the perception or measurement of risk. In many cases, the United States does not offer a least-risk environment to start or expand a manufacturing enterprise. 14 Daniel Luria. 2003. U.S. component manufacturing at a crossroads: Region-loyal production and global manufacturing deflation. Available at http://www.cows.org/supplychain/pdf/present/luria.pdf. Accessed November 2003.
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