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The U.S. Machine Too! Industry and the Defense Industrial Base C. omm~ttee on the Machine Tool Indllstrv .\1anufacturing Studies Board Commission on Engineering and Technical Systems .Nat~onal Research Council NATIONAL ACADEMY PRESS Washington D.C. 1983

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NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the co`.~,ittee responsible for the report were chosen for their special competences and with regard for appropriate balance. This report has been reviewed by a group other than the authors according to procedures approved by a Report Review Committee consisting of members of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The National Research Council was established by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy' s purposes of further ing knowledge and of adv is ing the federal government. The Counc it operates in accordance with general policies determined by the Academy under the authority of its congressional charter of 1863, which establishes the Academy as a private, nonprofit, self-governing membership corporation. The Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in the conduct of their services to the government, the public, and the scientific and engineering communities. It is administered jointly by both Academies and the Institute of Medicine. The National Academy of Engineering and the Institute of Medicine were established in 1964 and L970, respectively, under the charter of the National Academy of Sciences. This report represents work under contract number D~AK21-82-C-0091 between the U.S. Department of the Army and the National Academy of Sciences. A limited number of copies are available from: Manufacturing Studies Board National Academy of Sciences 2101 Constitution Avenue, N.W Washington, D.C. 20418 Printed in the United States of America

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COMMITTEE ON THE MACHINE TOOL INDUSTRY, Phase II JAMES E. ASHTON, Vice President, Rockwell International, Chairman MARGARET 8.W. GRAHAM, School of Management, Boston University, Vice Chairman ARDEN L. BEMENT, Vice President, Technical Resources, TRW, Incorporated JOSEPH E. CLANCY, President, Bridgeport Machine MICHAEL W. DAVIS, President, White-Sundstrand Machine Tool Company BELA GOLD, Director, Research Program in Industrial Economics, Case Western Reserve Univers ity HAMILTON HERMAN, Management Consultant NATHANIEL S. HOWE, Senior Vice President, Litton Industries RICHARD A. JAY, President, Work in Northeast Ohio Council ROBERT B. KURTZ, Retired Senior Vice President, General Electric WALTER L. MACORITTO, Manager, Manufacturing Research, Lockheed Corporation ROGER 8. ORLOFF, Vice President, Corporate Finance Group, Girard Bank HENRY D. SHARPE, Jr., Chairman, Brown and Sharpe Manufacturing Company CEDRIC L. SUZMAN, Vice President and Educational Program Director, Southern Center for International Studies JOHN G.T. THORNTON, Editor, Robot Insider ROBERT TRIMBLE, Vice President, Contracts, Martin Marietta Aerospace WILLIAM M. TRUSKA, Jr., President, Rousselle Corporation BERNARD WATERMAN, Industrial College of the Armed Forces FRED WOHLFAHRT, Project Manager, Technical Management and Systems Consulting, General Electric Company . . .

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PREFACE This report presents the findings and recommendations of the second of two committees formed by the Manufacturing Studies Board at the request of the Department of Defense to study the defense readiness and international competi- tiveness of the U.S. machine tool industry. The Committee on the Machine Tool Industry, Phase I, was a three-mor:h effort beginning in October 1981. It reviewed prior studies, defined issues, and designed the study to be undertaken in Phase II, which has resulted in this report. The Phase I study is a stepping stone for the Phase II analysis--this report--of the machine tool industry's competitiveness and defense readiness, in the light of its changing structure and capabilities. The committee is also indebted to the earlier studies of the machine tool industry, particularly those by the Machine Tool Task Force, the Defense Science Board, and the National Academy of Engineering. Important trends, however, have intensified in the machine tool industry since the writing of those earlier reports. New process technology is rapidly widening the scope of the industry beyond the traditional concept of metal-cutting and -forming equipment: further, structural changes within the industry include an increasing number of mergers, acquisitions, and joint ventures. A new study was needed that took as its starting point an emerging machine tool capability, reflecting both technological and structural changes. The Phase I committee designed a study to interpret the significance of this transformation of the industry for the Department of Defense (DOD) and to make recom- mendations for policy based on DOD's needs and the v

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emerging industry. This report presents the results of that study. The Committee on the Machine Tool Industry, Phase II, is solely responsible for this report. A number of others, though, have made invaluable contributions. Primary thong these is the Phase I committee, whose definition of issues and study design were the basis for the work represented in this report. Mel Horwitch generously gave many hours to assist the Committee in identifying trends and policy options; he also provided valuable comments on the several drafts of the report. Study directors Joel Goldhar (first half) and George Kuper (second half) contributed many of the insights to the Committee's discussion. Consultants Stephen Merrill and Jack Bloom provided analyses of the relationships among DOD, the machine tool industry, and prime contractors, and did the initial drafts of sections of the report. Staff officer Janice Greene assisted in the Committee's analysis and writing. Consultant William Levitt conducted and analyzed a survey of recent machine tool purchases by domestic firms. Consultant Harold Davidson provided a wealth of historical and procedural information from the Department of Defense. Charles Downer, of the National Machine Tool Builders' Associa- tion, was another important source of data. Consultant Edgar Weinberg provided statistical backup. Consultant George Krumbhaar researched issues pertaining to the viewpoints of prime contractors and also organized the Committee's comments into the final version of this report. Consultant Deborah Tomusko conducted case studies at machine tool builders; her research forms the basis for parts of Chapter 2. Staff associate Georgene Menk was responsible for the administrative work of the Committee, and Donna Reifsnider and Frances Shaw ably typed this report. The aforementioned help notwithstanding, there would be no report without the diligent efforts of a very hard-working volunteer committee, including a talented group of drafters led by our vice Chairperson, Margaret Graham. `Tames E. Ash ton V1

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CONTENTS 1. INTRODUCTIONee.ee. Statement of the Problem........... The U.S. Machine Tool Industry: The Problems of Maturity......... The DOD Interest .e e. Approach to the Study... Organization of Study... Notes 6 2. AN INDUSTRY RESTRUCTURED Overview of Changes The Traditional U.S. Machine Tool Industry 8 Technological Trends Shaping the Industry For; _ m_ ~~ ~ 7 New Entr ants and New Competitive Strategies 32 Response of Machine Tool Builders to There Changes.... e.~eeeeeeeeee.~.ee Conclusions.. e ~ ~eee~~~e Notes . 3. e THE DEPARTMENT OF DEFENSE' PRIME CONTRACTORS' AND THE MACHINE TOOL INDUSTRY: RELATIONSHIPS THAT AFFECT INDUSTRY STRUCTURE........ ...52 Size of DOD and Contractor Markets 53 DOD Procurement: Incentives and Disincentives 55 Manufacturing Technology Programs 56 Machine Tool Suppliers' Perspective on the Defense Procurement Process 63 Perceptions of the U.S. Machine Tool Industry: The Prime Contractors' Viewpoint 69 Domestic Legislation Affecting the Purchase of U.S. Produced Machine Tools 76 Conclusions ~ 79 Note~ eee.~.e.~81 4. PROBLEM SYNTHESIS AND RECOMMENDATIONS Problem V11 ..84 ...84

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Recommendations ~ 88 Conclusions ~ 96 APPENDICES e ~ ~ ~ ~ ~ e ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 99 A. Highlights of Phase I Study 101 B. Policies of Foreign Governments lll C. Questionnaire Sent to Machine Tool Industry Executives 118 . . . V11 1