Chapter 8

Findings and Recommendations

FINDINGS

1. A strong domestic manufacturing base is integral to sustaining innovation and maintaining global competitiveness in advanced technologies.1

a. There is growing and authoritative concern that the erosion of America’s manufacturing and high-technology base threatens to undermine U.S. leadership in next-generation technologies and the high value-added employment gains that would follow expanded U.S. high-technology production and exports.

b. Moreover, some analysts argue that maintaining a competitive onshore manufacturing sector and the associated skilled labor and technical institutions are linked and essential for long-term national competitiveness. They note that once manufacturing activity moves overseas, so do the required skills, networks and supply chains; and once offshore they, and the learning they engender, are difficult to recover. These analysts therefore argue that it is important for U.S. policymakers to be concerned with the capabilities and composition of the economy, just as policymakers are elsewhere.

c. The emergence of new technologies and other favorable developments, such as shifts in energy costs, open fresh windows of opportunity for manufacturing in the United States that can be exploited by new policies.

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1See the analysis in Chapter 1.



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Chapter 8 Findings and Recommendations FINDINGS 1. A strong domestic manufacturing base is integral to sustaining innovation and maintaining global competitiveness in advanced technologies.1 a. There is growing and authoritative concern that the erosion of America’s manufacturing and high-technology base threatens to undermine U.S. leadership in next-generation technologies and the high value-added employment gains that would follow expanded U.S. high-technology production and exports. b. Moreover, some analysts argue that maintaining a competitive onshore manufacturing sector and the associated skilled labor and technical institutions are linked and essential for long-term national competitiveness. They note that once manufacturing activity moves overseas, so do the required skills, networks and supply chains; and once offshore they, and the learning they engender, are difficult to recover. These analysts therefore argue that it is important for U.S. policymakers to be concerned with the capabilities and composition of the economy, just as policymakers are elsewhere. c. The emergence of new technologies and other favorable developments, such as shifts in energy costs, open fresh windows of opportunity for manufacturing in the United States that can be exploited by new policies. 1 See the analysis in Chapter 1. 166

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CHAPTER 8 167 2. Spread across 50 states and 60 centers, the Manufacturing Extension Partnership (MEP) is the leading U.S. government program designed explicitly to provide support services to the nation’s small and medium manufacturers.2 a. The target constituency: Small and medium manufacturers represent 98 percent of all manufacturing enterprises in the United States. They account for two-thirds of all manufacturing employment and contribute over half of the total value added by all U.S. manufacturers. b. Limited market alternatives: Given their small scale, limited resources, and scattered locations, many small and medium manufacturers report that private-sector alternatives to MEP are limited at best. While there are now more consulting services in most states than there were when MEP was originally established, small firms report that they cannot afford the fees of private consultancies and, in many cases, find that they do not adequately provide the type of services extended by the MEP system.3 In addition, other government programs do not focus as directly on providing technical and management advice to these small firms. c. Reach of MEP: Since its establishment in 1989, the MEP system has continued to grow to serve U.S. small and medium manufacturers. It now reaches out to some 7,000 manufacturers a year, providing a variety of services, from short-term cost reduction through lean manufacturing to longer-term growth initiatives. d. Diversity of the program: Given the engagement of a large number of state partners and the varying conditions in different parts of the country, there is considerable diversity in methods of operation and delivery of MEP services. e. Focus of MEP services: MEP is focused on providing services with proven technologies and methods to existing manufacturing firms. By contrast, many of the large-scale programs to support manufacturing around the world (described in Appendix A of this report) are designed to move new technologies forward from concept to prototype to commercial production. f. Net impact: Multiple assessments of MEP find that the program has a positive net impact, although it is important to note that not all MEP projects generate measurable returns.4 2 See Chapter 2 for a description of the MEP system. 3 NRC staff interviews with center directors in Pennsylvania, California, and Ohio, October- November 2012. 4 See Appendix B of this report for a survey of the literature on MEP evaluation.

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168 21ST CENTURY MANUFACTURING g. Federal-State Funding Match: The total MEP budget is about $300 million. One-third of this is provided by the federal government. Centers are expected to match federal funds with funding from other sources, notably fees for services to clients and funding from state governments. The federal contribution in FY 2013 was $123 million, with more than three-quarters going directly to the centers. h. Program Limits: While effective in meeting its specific mission needs, MEP is not designed to address the broader spectrum of competitive opportunities—from additive manufacturing to flexible electronics—on its own. The program, however, can be an increasingly important element in the nation’s portfolio of programs to support manufacturing and the jobs it brings. 3. Overall, MEP’s support for lean manufacturing shows evidence of success.5 a. Evidence of this overall success is found in academic reviews, noted above, as well as in the analysis, case studies, and interviews of company staff conducted for this study.6 b. It is important to note that not all programs at all MEP centers are successful all the time, nor should that be expected. In addition to the quality and timeliness of the advice provided by the centers, successful outcomes depend on factors internal to the company and on market conditions. 4. MEP’s annual budget is relatively modest, given the importance of SME manufacturing in the United States and in comparison to similar foreign programs. a. The total system budget of the MEP is about $326 million annually, comprising $128 million in federal support (in 2012) and 5 See Chapter 3 for a review of MEP and lean manufacturing. 6 See Chapters 4 and 5 for a review of MEP metrics and performance outcomes. Appendix B includes a survey of the evaluation literature, and Appendix C-2 documents the written responses of a number of center directors. The study also included a number of field visits by the committee to MEP centers, including centers in California, Georgia, Ohio, and Pennsylvania. The committee also held two workshops in Georgia and Ohio that brought together representatives from universities, state governments, innovation intermediaries, and small and large manufacturers. A major workshop launching this study also drew viewpoints from NIST MEP, MEP centers, and program users. See National Research Council, Strengthening American Manufacturing: The Role of the Manufacturing Extension Partnership—Summary of a Symposium, C. Wessner, Rapporteur, Washington, DC: The National Academies Press, 2013.

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CHAPTER 8 169 $198 million in state and local matches, fee income, and in-kind contributions.7 b. Despite a positive record of accomplishment, the National Institute of Standards and Technology (NIST) MEP’s budget is not commensurate with the importance of SME manufacturing to the U.S. economy. As a point of comparison, Canada’s IRAP program, which has a similar mission as MEP in terms of promoting and facilitating innovation, has been funded at approximately the same level as MEP and, recently, had its federal contribution doubled to $220 million a year.8 Canada’s population and economy are about one-tenth that of the United States. 5. MEP centers vary in terms of structure, services, and business models. This commendable variety makes the assessment and management of the overall program challenging. At the same time, this variety provides fertile ground for experimentation where individual centers can adapt to the needs of manufacturers in their particular region. However, the MEP system does not capitalize on this diversity of organizational experience as much as it might, and learning across the MEP system could be enhanced. a. The centers that make up MEP’s nationwide network vary substantially in organizational form, business model, and regional scope.9 b. The role of NIST MEP headquarters is to provide strategic direction and to assess and certify the regional MEP centers’ operations based on established metrics, while providing one-third of the budgets of the regional centers on a matching basis. c. NIST MEP influences individual centers by evaluating them on terms designed by NIST MEP, with the implicit sanction of the withdrawal of funding. Yet, centers can only be influenced up t o a point. They have other stakeholders locally—often including the state in which they operate—and they have an over-riding imperative to maintain a business that is sustainable over the long run. While NIST MEP does sometimes decertify a center, leading to a recompetition for the region, in fact, recompetition as a 7 As of this writing, the President has proposed in his FY 2014 budget an additional $25 million to this program. 8 See the review of the Canadian IRAP program in Appendix A-1. 9 See, for example, descriptions of California’s CMTC, Enterprise Minnesota, Ohio’s MAGNET, and Pennsylvania’s Catalyst Connection in the National Academies 2011 conference on “Strengthening American Manufacturing: The Role of the MEP.” The committee has also conducted additional studies of MEP centers, including the Georgia MEP center. For a description of the overall MEP system, see the NIST MEP homepage at .

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170 21ST CENTURY MANUFACTURING sanction is rarely applied. Most recompetitions occur as a result of changes in state policy or an institution’s inability to meet matching requirements. While, in some cases, informal pressure is sometimes applied through direct contact by NIST MEP management, this appears to be neither systematic nor transparent.10 d. There are large differences in MEP center performance on a variety of metrics. While some centers perform well on particular metrics, there currently appear to be minimal structured efforts to distill and adopt best practices across the MEP system. This learning across the MEP system is especially important at a time when centers have been asked to make substantial changes in their operations and when financial pressures facing centers are in many cases acute. 6. The current fixed funding formula, where NIST MEP uses federal funds to provide one-third of the funding, is outmoded and limits the adaptability of the MEP system. a. Fixed Matching Funding Formula: Currently, MEP centers raise funds from state governments and client fees, as well as from other sources, such as philanthropic organizations. These funds are matched by NIST MEP at a ratio of one dollar for every two dollars the centers bring in. b. Impact of matching requirements: i. Limited leverage: NIST’s matching contribution is critical to the ability of MEP centers to attract state resources and private revenue generation. Yet, NIST MEP’s influence over the management of the individual MEP centers is limited.11 The rigidity of the current matching formula limits, for example, NIST MEP’s ability to provide additional incentives to encourage state MEP centers to learn from and adopt best practices from across the system. ii. Declining resources: For the MEP centers, the federal matching requirement also amplifies the cuts in funding from other sources. Thus, when a major matching partner—such as the state government—reduces or eliminates its funding contribution, even successful MEP centers can become 10 See Chapter 2 on the relationship between NIST MEP and MEP centers. 11 See the related analysis in Chapter 1. Complete program control by NIST MEP, in any case, would not be desirable given the program’s broad geographic dispersion and the unique features of many regions. There can be, on a case-by-case basis, informal means of influence from NIST MEP headquarters.

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CHAPTER 8 171 trapped in a cycle of declining resources.12 This can result in a suboptimal level of coverage and service in relevant manufacturing locations. iii. A greater focus on client revenue: To sustain the federal match, the MEP centers currently must overcome declines in state funding through greater reliance on client revenue.13 This matching structure incentivizes the MEP centers to focus on short-term client income rather than on the overall MEP mission. It is not clear how these short-term measures will mesh with MEP’s new long-term strategy (described below) to drive manufacturing growth and innovation. iv. Impact on MEP mission: The need to meet the federal match through fees and the reliance on in-kind contributions is pushing the program away from its presumptive target group—i.e., away from smaller companies and rural firms that should be a part of MEP’s public vocation. MEP centers that work with the target audience of SMEs also tend to have smaller jobs impacts. Centers in markets with a greater percentage of smaller companies, or centers that choose to focus on the SMEs tend to be at a disadvantage in the calculation of results. 7. MEP efforts to add support for innovation and growth through its national network are commendable. a. MEP focus: The committee commends efforts to enhance the innovation capacity and growth of small manufacturers under the new strategic orientation. This strategy is in line with recent academic and policy analyses that call for U.S. manufacturers to become more innovative and more focused on growth and international competitiveness.14 MEP—with its nationwide network of centers and mission to support small manufacturers—is well placed to support this effort.15 b. Mitigating risks: The successful implementation of the Next Generation Strategy (NGS) will, however, require mitigating the risks faced by MEP centers (see Finding 8), developing a robust roadmap to expand new service capacities (see Finding 9), and 12 See the related analysis in Chapter 1. Some centers (e.g., Minnesota and California) now operate entirely without funding from their state governments. 13 Interviews with staff and clients at MANEX and CMTC (MEP centers in California). 14 See Chapter 1 for a review of the related academic analysis and policy initiatives. 15 Interviews with staff and clients at MRC and DIVRC (MEP centers in in Pennsylvania), and with Magnet (Ohio).

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172 21ST CENTURY MANUFACTURING fostering the exchange of best practices among MEP centers (see Finding 11). 8. Implementation of the Next Generation Strategy (NGS) poses risks and challenges for MEP centers. a. Revenue risks for centers: MEP centers encounter significant risks as they seek to transition from a tight focus on lean production to a much wider range of services that require new clients, new contacts, new kinds of client conversations, new services, and new toolsets and capabilities. For some centers, this will require the addition of qualified staff and other resources. Centers must make this transition to NGS while maintaining revenue levels in the absence of direct financial assistance from NIST MEP. b. Demand Risks for New Services: While the new services offered under the Next Generation Strategy are designed to support growth and innovation among the nation’s manufacturers, this supply-side push needs to be matched by sustained demand for these services for this strategy to be economically viable for the MEP centers. 16 At present, some centers see sufficient demand for the new services, but others do not.17 There is the additional possibility that this focus on innovation-related initiatives could simply result in the reclassification of existing activities. MEP centers face the need to provide services that clients are willing to pay for, in order to ensure that they meet matching funds requirements. 9. NIST MEP introduction of innovation and growth-related services are too narrowly based. a. Early identification of services: Currently, the introduction of new services such as “Innovation Engineering” and “Technology Acceleration,” are largely experimental, with much of the experiment being supported and funded by NIST MEP. Bearing this in mind, NIST MEP may have committed too early and too fully to a particular set of services that may or may not turn out to be successful and cost-effective across the MEP centers. b. Role of single providers: NIST MEP has selected one contractor for each type of growth service. These contractors are to provide training for the MEP centers so that they can rapidly become self- sufficient in delivering new services. NIST MEP has awarded large 16 See Chapter 6. 17 See comments by MEP center directors, compiled in Appendix C-2.

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CHAPTER 8 173 contracts to single providers for each strategic sector. Such a single provider approach carries inherent risks. c. Need for clear milestones: NIST MEP has a strong history of developing metrics for its activities. It is therefore surprising and a matter of concern that NIST MEP appears to have no clear milestones for the consultants associated with the provision of new strategy services. The largest and most expensive component of the new strategy is an innovation-engineering program, provided to MEP centers through the Innovation Engineering Leadership Institute (IELI). Despite repeated requests, the committee has not been provided with systematic and independent evidence about the take-up or impact of the innovation-engineering program. Two other NIST MEP initiatives—a technology scouting program offered by RTI International and the ExporTech program to help companies develop international marketing strategies—have both provided some evidence about outcomes, but not about agreed milestones with NIST MEP. d. NIST seems not to have drawn on expertise from the best centers within the system. Some of the substantial funding for contractors might have been more effectively allocated to centers with strong track records on innovation and growth, perhaps for the explicit purpose of supporting change at other centers (see Finding 11). 10. Successful implementation of the Next Generation Strategy depends on the strength of the individual MEP center: 18 a. Capital infusion: Among the MEP centers reviewed for this study, those best adapting the new services appear to have received additional state or other investments. These resources supported their development of and then transition to growth services. b. Leadership: Center leadership and the composition of each center’s advisory board are important factors in their effectiveness and adaptability; both of these factors appear to vary substantially among centers, suggesting that effective take-up of NGS across the MEP system will be uneven. c. Local and regional networks: MEP centers that successfully add new strategy services appear to be especially well connected to the local manufacturing community and other stakeholders (such as local universities). They have also developed mechanisms for 18 Interviews with the leadership of several MEP centers, including those of Georgia Tech, Magnet Ohio, and MRC and DVIRC in Pennsylvania. The committee also received written submissions of comments from 42 MEP centers.

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174 21ST CENTURY MANUFACTURING enhancing these connections, such as executive education and networking projects. 11. Adopting best new strategy practices within MEP. Development and rollout of new strategy services are both financially risky and technically demanding. It is therefore important that the experience of individual MEP centers be shared effectively across the network, so that follower centers can benefit from the experience of path-breakers and avoid potential pitfalls. Most centers do not have the resources to afford false steps. Hence, the gaps identified below could have significant long-term consequences both for individual centers and for the program as a whole. a. Peer-to-peer activity: While some centers do reach out to other centers, there is no easy way to determine which centers have the most experience with specific issues and approaches. NIST MEP does not provide an effective online forum for peer-to-peer interaction between center director and other center staff. b. Role of the MEP Annual Conference: A number of center directors observed that the MEP annual conference provided the primary path for informal and formal knowledge exchanges.19 Currently, no annual conferences are planned for 2013 or 2014. c. Identifying best practices: Currently, NIST MEP does not formally identify best practices, nor does it circulate the results of such assessments. 20 d. Cross-center training: While some centers do provide training and direct client services to other centers (for example, Pennsylvania’s DVIRC has provided some new strategy services to the New Jersey MEP center), MEP CORE metrics apparently do not record and recognize these initiatives. 12. NIST MEP evaluations and programs are evolving from a focus on quantified metrics derived from a survey of clients and center reporting to a new emphasis on qualitative metrics. a. The previous evaluation system, Minimally Acceptable Impact Measures (MAIM), had several flaws: Notably, the system collected extensive information of uncertain value in time frames that were arguably too short. The centers were evaluated on the percentage and character of survey responses they generated. 19 Interviews with MEP center staff at DVIRC and MRC in Pennsylvania, and MANEX and CMTC in California. 20 For a review of external assessments of the MEP program, see Appendix B.

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CHAPTER 8 175 Moreover, there appears to have been insufficient separation between the respondents and the MEP centers despite the use of a third party to administer the survey. i. Self-reported data: MEP evaluations of center activities have traditionally depended on data reported by participating manufacturers and on center reports related to center processes, e.g., those related to the acquisition of distribution of center funding, and the use of center expertise. While MEP’s reliance on self-reported data is in line with the evaluation efforts of other small business support programs, some aspects of this approach may negatively affect the quality of information and related assessments. ii. Timing of surveys: Deployed only six months after MEP centers submit client information, the NIST MEP survey is arguably premature, and thus unable to capture the impacts of longer-term MEP interventions, especially those resulting from innovation-oriented services. iii. Use of data: Collected data appears not to have been systematically utilized by NIST MEP to drive improvements in center operations. b. New CORE metrics provide a more nuanced view of center activities: In 2012, NIST MEP introduced a new CORE (Center Operations Reporting and Evaluation) metrics system. The new metrics are a positive development, as they reduce reliance on the client survey and seek a balanced scorecard that includes attention to center innovation and growth services. Further, the effort to include qualitative indicators is welcome, as is the emphasis on utilizing the metrics to help centers manage better. 21 In addition, the survey is now deployed on a more flexible schedule, at least in principle. c. Concerns about the new CORE metrics remain: Although these metrics were only recently introduced (in 2012), there are several issues: i. Survey burden: The client survey has not changed, and concerns remain that it places a substantial burden on recipients. In addition, the NIST MEP survey requires an extremely high response rate, which heavily burdens the centers and may well unintentionally tend to bias the results. As a consequence, while reliance on the survey is reduced in 21 NIST MEP Webinar for NRC staff, July 23, 2012.

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176 21ST CENTURY MANUFACTURING the development of the overall assessment, the survey itself retains its previous flaws. ii. Complexity of survey: At the most basic level, some firms find the survey difficult to complete, with too many complex calculations and requests for data that many small firms simply do not compile. 22 iii. Potential for bias: Given that the center’s certification and funding depends on positive responses from their clients, MEP center staff are incentivized to encourage their clients to respond actively to survey requests and to ensure that responses are as positive as possible.23 iv. Survey timing: While MEP has added survey windows to help MEP clients better report the long-term impact of MEP center services, these may still be insufficient especially in long-cycle industries, while it appears that a large majority of clients will continue to be surveyed on the standard six-month cycle. v. Transparency: The new qualitative metrics may require a more transparent assessment process, especially if they become important for the allocation of NIST MEP funding. 13. Major U.S. trading partners have initiated substantial programs to support manufacturing. a. A key element of the committee’s task was to examine programs to support manufacturing in other countries. As documented in Appendix A of this report, many other countries intervene with substantial resources and well-equipped facilities early in the product development cycle. Drawing on a portfolio of programs and policies, they provide shared-use facilities, expertise garnered from working on multiple projects over long periods of time, and connections to other parts of the innovation ecosystem, be it suppliers, customers, or sources of finance, as well as a ready and low-cost source of technical support. b. Major U.S. trading partners understand that a robust domestic industrial base that can produce advanced products in high volumes, and the high-skilled jobs that this productive activity generates, are integral to maintaining global competitiveness. 24 They believe that these shared facilities and capabilities also 22 See Chapter 4. 23 Interviews with MEP center directors, Pennsylvania, California, and Ohio, and Georgia, as well as during the NRC MEP workshop in Washington, DC, November 29, 2012, and December 6-7, 2012. 24 See the analysis of foreign policies and programs to support manufacturing in Chapter 7.

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178 21ST CENTURY MANUFACTURING i. Innovation clusters: Collectively, these activities contribute to the development of successful innovation clusters and regional economic development. 15. While the United States has numerous public organizations engaged in applied research, notably in fields such as medicine, agriculture, energy, and defense, large segments of the U.S. manufacturing sector are often underserved with respect to technological support from the national research base. a. Fragmented U.S. programs: Existing federal programs to facilitate applied research for manufacturing are much more limited in funding, focus, and scope as compared to similar programs in other technologically advanced countries.28 They do not have the same broad impact as do these foreign programs.29 b. Limited commercialization: Promising new technologies developed from basic research conducted in the United States, often with public support, are increasingly commercialized outside the United States with little effect on domestic value added or jobs. c. Supply chain gaps: Significant gaps exist in some domestic industry chains in technology-intensive U.S. industries. d. Limited manufacturing skills: Some industry leaders have argued that the United States needs to enhance the training of scientists, engineers, and technicians with the skills necessary to staff manufacturing facilities in technology-intensive industries. e. Limited private technology transfer: While the private sector (particularly in larger firms and in consultancy) engages in technology transfer, it is not fully able to address the needs identified here. f. Awareness: In many cases, small and medium businesses often do not know where or how to pursue technological support from the research base.30 g. MEP role: The role of the MEP in linking with proposed U.S. manufacturing institutes and other major manufacturing initiatives has not been made explicit. 16. The most successful foreign applied research programs around the world share elements of the following characteristics. 28 See Chapter 1 for a partial list of federal programs to assist manufacturing. 29 See Chapter 7 and Appendix A of this report for a review of leading national manufacturing programs. 30 See Appendix B.

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CHAPTER 8 179 a. Substantial and sustained funding over a long-time horizon, to provide first-class equipment and infrastructure and retain qualified staff to maintain focus on core missions and client base. b. A high degree of autonomy in establishing technology strategies, deploying resources, and developing relationships with the private sector. c. Funding from contract research: Foreign programs often derive a significant fraction of their income from contract research, primarily from the private sector, and receive public funding according to a formula rewarding the volume of industry contract work and support for SMEs. d. Institutional support for start-ups: They establish internal structures, including venture capital funds and incubators, and provide legal assistance with respect to intellectual property rights, to support the start-up and spin-off of new companies. e. Links to local clusters: They contribute directly to the development of local innovation clusters. f. Partnering with universities: They collaborate with universities, often drawing a significant proportion of total professional staff from the ranks of students pursuing advanced degrees in the science, mathematics, and engineering fields. g. Training: They contribute directly to the training of technical staff. h. Strategic priorities: Some establish as a strategic priority the creation and augmentation of onshore industry chain. i. Collaboration encouraged: They encourage companies to collaborate in onsite research and demonstration projects, including the operation or simulation of entire industrial production processes. j. Networks: They develop organizational networks linking sister institutions, universities, and internal departments in a manner which permits the deployment of a combination of research competencies to address specific technological problems raised by individual companies. k. Centers with business expertise: They develop internal business expertise, including an understanding of the potential commercial applications of new technologies, with respect to relevant industry sectors and subsectors. l. Regular review: Centers are subject to periodic assessments by independent reviewers on a longer-term basis.

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180 21ST CENTURY MANUFACTURING RECOMMENDATIONS While the committee finds that the MEP program provides valuable help to small manufacturers, with the enhancements recommended here, the program will be an increasingly important element in the nation’s portfolio of programs to support manufacturing and the jobs it brings. 1. NIST MEP should focus more on driving the overall improvement of MEP centers rather than focusing on the outcomes of individual projects. a. Develop performance incentives: To improve overall center performance, NIST MEP management should be tasked with developing incentives to drive center performance. b. Promulgate best practices. NIST MEP should identify and help promulgate best practices among centers. The need for much better communication of best practices is strongly underlined by the need to share tools and techniques that work in implementing the Next Generation Strategy. Many centers have limited resources, which constrains their ability to undertake new and higher-risk strategies. They need access to relevant experience and best practices to help ensure success. i. Peer-to-peer communication: NIST MEP should encourage centers to provide help and support to each other: A peer-to- peer model may work better than standard vertical communication between individual centers and NIST MEP in this regard. ii. Pilot programs: NIST should provide additional funding for pilot programs that assess the performance of MEP centers against relevant comparison groups. iii. Centers of excellence. NIST MEP should consider fostering centers of excellence amongst the centers. This may be challenging in such a distributed environment, but fostering these centers of excellence can have important systemwide impacts. iv. Annual conference. NIST MEP should consider reinstating the MEP annual conference as soon as possible. v. Center directors’ forum. NIST MEP should consider providing—or encouraging the independent development of— an online forum in which center directors and other staff can exchange information, focused on the transfer of best practices among them and the efficient solution of operational problems and questions.

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CHAPTER 8 181 c. Address revenue stability for the centers. The proposed shift in the business model has potentially significant financial implications for the MEP centers, given that many of them rely on the revenue stream from current clients to remain in operation and to meet the matching requirements (see below). 2. The Manufacturing Extension Partnership should use its resources to leverage maximum beneficial outcomes for the U.S. manufacturing sector rather than focus on reaching the maximum number of manufacturers. a. With its current resources, MEP should focus its analysis on identifying and supporting manufacturing firms that are most able to benefit from MEP services. As with any service provider, spreading MEP services too thinly may well result in suboptimal results overall. b. MEP should identify those markets and clients where the impact of program resources would be greatest—particularly in terms of long-term productivity, sustainability and innovation performance—that will in turn, anchor good-quality jobs. This strongly suggests that MEP centers should focus on selective client acquisition. Market penetration metrics should focus on generating a sustainable client base. c. In addition, MEP should consider metrics that measure market penetration and innovation over time rather than a single year, as manufacturers may not need MEP services every year. Adopting a longer, multiyear time frame for analyzing center and program performance would provide a better assessment. 3. MEP should continue to encourage lean manufacturing. a. Given that lean manufacturing remains at the core of a successful manufacturing support program, MEP should encourage centers to maintain the current capacity in this area and integrate lean manufacturing into new initiatives including those related to innovation. b. NIST MEP should adjust its CORE metrics to better reflect the continuing importance of lean manufacturing for the centers. 4. MEP should continue efforts to enhance growth, increase innovation, and improve sustainability though its Next Generation Strategy. At the same time, NIST MEP needs to address the challenges inherent in this transition.

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182 21ST CENTURY MANUFACTURING a. Recognize risk to centers: NIST MEP must recognize that maintaining its revenue base is necessarily a primary center objective, and that growth strategies must be adapted accordingly with variation across centers accepted (see Recommendation 5). b. Analyze demand for growth services: NIST MEP should help centers analyze the demand for growth services, and review patterns of demand across centers. This should include a review of centers with leading edge services. It should also identify firm populations where growth services are likely to be effective. c. Benchmark service providers: NIST MEP should develop appropriate benchmarks for all major service providers and review them regularly. Single provider contracts should be used sparingly, should require a detailed justification, and should have clear deliverables and metrics, and be closely monitored. Competitions for contractors should be conducted wherever possible. d. Eliminate duplication of services: Based on a regional survey of effective alternative private- and public-sector service providers, NIST MEP should encourage centers to avoid the direct provision of services already provided effectively to manufacturers, including NGS services. e. Identify success factors: NIST MEP should identify emerging best practices in implementing the Next Generation Strategy, reward them, and encourage their adoption, where relevant, across the system. f. Develop networks: MEPs might consider developing networks connecting SMEs to the local value chain, including original equipment manufacturers, universities, and national laboratories. These networks could be regional, sector based, or cross-sectoral. g. Improve administration: Achieving the goals of the new strategy while maintaining services related to lean manufacturing creates new requirements of people, mechanics, and execution. This calls for the recruitment and training of staff to address new challenges. h. Advisory boards: Effective leadership, supported by rigorous advisory boards, or their equivalent, will be essential for NIST MEP and MEP centers in their strategy and operations. The makeup of advisory boards comprising diverse expertise including manufacturing savvy can accelerate the progress and performance of MEP’s service to manufacturing firms. 5. NIST MEP should significantly improve its collection and analysis of performance data. a. Develop analytic capacity: MEP should develop both in-house and external data and the analytic capacity to provide ongoing and independent evaluations of its new initiatives. This will aid MEP

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CHAPTER 8 183 to identify programs and initiatives worth expanding, those that should be adjusted, and those that are a poor use of resources. MEP should also assess cost savings and earnings gains against public support for the program. b. Consult stakeholders: The new strategy should include metrics that are both clear and take more fully into account the informational demands placed on participating small firms. The selection of subjective performance criteria should also include input from state and other stakeholders. c. Independent assessment: MEP initiatives, and in particular the specifics of the new strategy, should be periodically assessed by an expert and impartial third party. As per best practice, outcomes data should be collected by independent survey organizations. Contractors conducting surveys should use a standardly-accepted, rigorous methodology to ensure the validity of survey responses and adequate response rates. d. Response rates: Benchmarks for response rates should be developed over time. MEP survey evaluations should be run independently of MEP centers, and the contractor running them should be incentivized to develop and seek an appropriate response rate with high-quality data. e. Survey Timing: As MEP moves to support projects with much longer time horizons—for example focused on innovation—it will be necessary to adjust the timeframe of outcome surveys to match this new approach. With the new innovation-oriented interventions, six months is too short a timeframe to gather meaningful data. f. Identify center best practices: MEP data and analyses should identify best practices, and measure the relative accomplishments of individual initiatives and center activities. The centers should be given considerable latitude and be viewed as laboratories for new initiatives, where rapid and effective assessment in turn leads to the adoption and transfer of best practices. g. Develop milestones: The effectiveness of support programs should be examined and, if they are to be continued, an integrated set of metrics and related milestones should be developed to gauge their deployment. The use of these ancillary programs should be linked to the adequacy of the MEP funding. h. Data analysis as a service: Analysis of the data could be more effective if considered as a service that NIST provides to centers for internal and state-level management of the center. 6. With the adoption of the improvements recommended here, Federal funding for the MEP program should be at a level

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184 21ST CENTURY MANUFACTURING commensurate with its mission, and take into account relevant international benchmarks. a. Funding for MEP should be commensurate with the importance of manufacturing to the growth of the economy and the program’s proven ability to contribute to improved firm performance and adapt to the changing needs of the manufacturing sector. i. MEP's annual federal budget of $123 million (in 2012) is modest, compared to the target population and to the efforts of our competitors in the global economy. As a point of comparison, Canada’s IRAP program, which has a similar mission as MEP in terms of promoting and facilitating innovation, has been funded at approximately the same level as MEP and, recently, had its budget essentially doubled to $220 million a year. Canada’s population and economy are about one-tenth that of the United States. ii. The current level of funding is not adequate to maintain the program’s focus on small firms, build new services around the Next General Strategy, and provide the resources required to drive the improvements recommended by this assessment. b. The committee believes these additional funds can be used effectively by the program, particularly with the more flexible approach recommended above. i. The program needs to expand in order to support its new strategy while maintaining the integrity of the current portfolio of services that have proven effective. ii. Additional funding for MEP centers should, in principle be distributed to the centers, but not be entirely on a pro rata basis. For example, NIST MEP should be encouraged to offer centers additional matching funds for pilot projects that support new ways to accelerate and enhance movement toward the objectives of the NGS. iii. NIST MEP should direct some of the additional funding recommended by this committee to develop innovative services, encourage diffusion and adoption of best practices, and fund the data collection, analysis, and evaluation needed. 7. NIST MEP should be more flexible in the management of the funding of MEP centers. The fixed federal match of one-to-two from the states and centers should be changed to a match approach with more flexibility for NIST management and the centers.

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CHAPTER 8 185 a. The current MEP funding model, on its own, can result in perverse impacts on a center’s viability, as a loss of state funding translates into a loss of federal funding. Declines in center revenues (even short-term declines) can result in a decline in federal revenues. b. The matching requirement for MEP is outmoded: Significant risks exist in the current funding levels due to the existing problems with the match and the concern about putting the current funding model at risk due to the adoption of the Next Generation Strategy—NIST’s new strategy for the centers. By changing the match and recommending additional program funds, the committee seeks to address these concerns and strengthen MEP’s financial stability. c. To enhance program flexibility and adaptability to new circumstances, the NIST MEP director should be permitted to waive the two-to-one match, as circumstances require. Secondly, MEP centers should not be required to match new funds at a one- to-one rate. Consideration should be given to moving the entire system to a lower match that is more consistent with other Department of Commerce programs and with due attention to maintaining state contributions. 31 8. Any effort to establish programs to further support manufacturing should thoroughly assess existing U.S. resources, organizations, and institutions already engaged in applied research and should take into account lessons from U.S. and international best practice. These best practice lessons might include, inter alia: a. Focus: These new organizations should not be considered a replacement for the MEP program, nor should they replicate existing public and private technology transfer and applied research organizations. Where possible, existing institutions with sufficient capability and that are well-anchored in the local and regional innovation system should be given priority over the creation of greenfield facilities. Creation of new organizations should be targeted to (a) filling gaps that are identified in the existing U.S. ecosystem for applied research and (b) pursuit of promising new technologies in thematic areas in which the market, and the policies of competitors, are unlikely to produce a satisfactory outcome for the U.S. economy. b. Draw on best practice: The organizations and the enabling legislation should draw on international best practices. Likewise, 31 For a discussion of this point, see Chapter 1.

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186 21ST CENTURY MANUFACTURING the MEP program should seek to learn from foreign programs through the exchange of best practices. c. Branding: Initiatives to support manufacturing might bear a designation drawing on the name of an American innovational pioneer (e.g., Edison, Noyce) to establish a brand synonymous with excellence. d. Encourage public-private partnerships: The most successful foreign applied research institutes involve public-private partnerships, a structure which leverages public financial support, research excellence, and private-sector participation to ensure a mission focus on research with commercial and industrial relevance. e. Dual mandate: The organizations should have a dual mandate: (1) to support incremental and continuous technological improvements in established industries and (2) to facilitate the development and testing of new products, either for existing innovative companies or to help develop new companies in emerging technological areas. f. Integration with field services: If significant numbers of small manufacturers are to be engaged with new manufacturing support organizations, it is vital to provide pathways and assistance so that small manufacturers can access and use these new capabilities and opportunities. In the United States, the MEP already offers a mechanism to achieve this. Ensuring linkages with new manufacturing support organizations would leverage the MEP’s existing public and private investment and expertise in outreach, services, and tools to contact small firms and enhance innovation upgrading. g. Invest in research infrastructure: Public investments should be focused on the plant, equipment, and human capital for applied research, whether at universities or other institutions. Companies should be incentivized to furnish equipment and/or prototypes. These resources should be made available to industrial partners for precompetitive R&D, prototyping and process R&D. h. Incentives for firm development and training: The organizations should be incentivized to prioritize support for small businesses, while also providing support for medium and large companies on a case-by-case basis. Incentives should also be provided for each organization to develop apprenticeship programs in advanced manufacturing. Cooperation with local institutions, e.g., community colleges, should be encouraged and incentivized. i. Provide stable public funding: While public funding for research organizations should not be open-ended, it should be substantial and sustained; i.e., it should be provided for a sufficiently long- time horizon to enable institutions to maintain focus on their core

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CHAPTER 8 187 mission (rather than fundraising), acquire necessary equipment and facilities, and retain key personnel. j. Encourage start-ups: Research organizations receiving public funding should be tasked with fostering start-ups to commercialize promising technologies through spin-offs from the organizations and provision of incubation services that include access to the organizations’ research infrastructure. k. Foster collaboration and networking: Research organizations receiving public funding should incentivize internal collaborations and team building by their own personnel and external collaboration with other institutions and industry consortia and associations. l. Foster entrepreneurialism: Research organizations receiving public funding should include staff with business training that are tasked with linking onsite research to specific commercial applications, including the establishment and strengthening of supply chains, improvement of manufacturing efficiency, and the commercialization of new products. m. Conduct periodic arms-length reviews: Each research organization receiving public funding should be subject to periodic audits by external objective experts with backgrounds relevant to the work of the organization to assess effectiveness and cost- benefit balance.

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