New Directions in Manufacturing: Report of a Workshop (2004)

Anthony C. Mulligan

Advanced Ceramics Research, Inc.

Small manufacturing enterprises are important to the U.S. economy for a number of reasons. Since the early 1980s, manufacturing employment has become increasingly concentrated in smaller plants and decreasingly concentrated in larger companies. In 1994, 65.8 percent of total U.S. manufacturing sector employment came from companies with fewer than 500 employees.

Although there are a number of different types of manufacturing companies, this paper will focus on commodity product manufacturing; job shop manufacturing; and high technology manufacturing. Commodity product manufacturing involves the manufacture of products such as printers and houseware products, much of which is moving overseas. Job shop manufacturing involves the machining, molding, and stamping of basic parts. High technology manufacturing consists of high end products such as optics, materials, biotechnology, sensors, and medical devices.

Understanding the small manufacturer’s point of view on manufacturing issues requires an understanding of the markets for their products. Commodity product manufacturers sell to the end user, as well as to wholesale entities or distributors. In addition, they sell to larger manufacturing enterprises that then incorporate the product or service into their own products or services. Some of these larger companies may have business relationships with the Department of Defense (DoD). Job shop manufacturers tend to be dependent for business on component suppliers to larger enterprises. This type of SME may also do some value-added work for large enterprises. Job shop manufacturers do not in general have direct sales to DoD but may do work for DoD through prime contractors. High-technology manufacturers may be dependent on supplying components or systems to larger enterprises. For example, a high-technology manufacturer may improve semiconductor processing through the development of new equipment or parts. If necessary, such an SME may sell directly to retail or wholesale outlets. High technology manufacturers may work either directly with DoD or through a prime contractor.

There are a number of common issues of interest to small manufacturers that need to be addressed. Small manufacturers have a small client base and are therefore highly dependent on the expected revenue from each client. If anything goes wrong with one of these clients, it

can seriously jeopardize the business. Small manufacturers have small management teams that struggle to meet all the demands on them. Many small manufacturers have been forced to become leaner and, as a result, have limited legal, marketing, and human resource personnel. This leanness makes them more vulnerable to potential lawsuits that may arise from the increasingly complex liabilities related to products and services, workforce issues, federal regulations, and corporate issues. In an SME, capital is typically dedicated to operations, with limited access to capital for improvements such as equipment upgrades, facility expansions, marketing and sales force expansions, or the incorporation of new technology. Small manufacturers are usually fighting for survival and must therefore focus on day-to-day operations, rather than planning future growth.

Retirement is an issue of concern to smaller manufacturers. There are no mechanisms in place for transferring knowledge from retiring employees, and there is a smaller pool of talent available for the next generation of senior managers. Another alarming issue facing small manufacturers is the lack of education of entry-level production personnel who graduate from high school without the basic reading and writing skills required for the jobs. Most small manufacturers believe that this problem is compounded by a trend to reduce vocational education in high schools. In order to cut costs, many high schools have dropped shop classes. Due to safety and insurance issues, shop classes are more costly than, for example, computer laboratories for software development. There are shortcomings in the remaining vocational courses because high school graduates do not have the knowledge or desire to learn the manufacturing trade. As a result, the biggest problem faced by small manufacturers is a lack of trained production workers.

The rising cost of health insurance is a serious issue for small manufacturers. Small companies are, for the most part, family-owned and typically cover all health insurance costs for their employees. While the costs of health insurance are increasing each year, some years by almost 50 percent, health services seem to be decreasing. In the end, small manufacturers are forced to trade off production capability for health insurance, resulting in perhaps one less person that the company can hire.

Globalization of manufacturing results in new challenges for small manufacturers. With manufacturing moving overseas, sales follow suit. It is difficult for small manufacturers to provide effective service overseas. For example, with domestic clients, you can visit 3 or 4 customers per day. Because most of the computer industry has moved to Asia, it now takes up to 4 days to visit one customer in that industry. This makes it more difficult to compete with local manufacturers. In addition, larger companies are moving around, making the market more unstable and causing relationships to change every 1 to 2 years. Finally, the current affairs of other nations have an increased impact on business abroad.

Another major trend is forcing small manufacturers to change from being component suppliers to being systems suppliers. Previously, a large company would purchase several types of brackets from different companies. Today, contracts being awarded to large companies often require a reduction in administrative costs, with the result that the large company prefers to bundle contracts and orders. Large companies therefore want to buy preassembled systems from one company. This trend is not just relevant for DoD but also for companies such as General Motors and IBM.

Small manufacturers must also reconsider their relationship with government organizations, for a number of reasons. First, if an SME works exclusively with DoD, profit margins are typically tight and the SME becomes extremely vulnerable to program changes. If a program is cancelled without warning, the small companies that spent time building up for it will almost always go under as they do not have the infrastructure to support the loss. Second, big

delays in receiving payments can cause problems for small companies. Cash flow becomes a problem because wages must be paid. Third, fewer competitions result in intense pressure to bid low. Major competitions are seen as “must win.” The result is thin margins, greater risk, and overruns. Government agencies often impose cost caps on cost-type development contracts, making it difficult for small manufacturers to make profits. Government agencies often impose, and companies accept, production cost curves before development is complete; these often prove to be optimistic.

Finally, DoD is still struggling to transition its acquisition and business practices to either a commercial business model or a hybrid model. Numerous efforts and initiatives have thus far failed to produce an industrial policy that addresses a changed industrial reality and helps small manufacturers. DoD and independent agencies frequently state that without a clear vision and committed mandate, DoD and its prime suppliers could be in a precarious position with regard to technology and people. Small manufacturers have a vital role to play in addressing these shortcomings, but do not presently have a voice within DoD acquisition groups.

The involvement of small manufacturers is essential to a strong, competitive, and cutting-edge DoD. In order for small manufacturers to prosper, increased integration of supply chains is needed, as well as easier access to technology and better access to capital. Public awareness programs must be created to make working for small manufacturers more appealing to the new work force, including both experienced management and technical staff. A mid-level brain drain is occurring throughout the supply chain. This is a void that small manufacturers can fill, working with each other in partnerships and virtual environments, and working with DoD and major prime original equipment manufacturers.