Executive Summary

Manufacturing firms—large and small—face massive change and adjustments as they move from a stable, fault-tolerant environment of long production runs to a volatile world in which production runs are short, product characteristics are constantly changing, and defect-free on-time production at decreasing prices is a condition for survival. The necessary changes in the organization of production include everything from the layout of the shop floor to the distribution of authority between managers and workers. The magnitude of these transformations threatens to overwhelm the managerial capacities of firms regardless of their size.

These dramatic changes in the requirements for successful manufacturing are happening during a period of steady increase in the number of smaller industrial firms1 and a trend toward facilities with fewer workers. Smaller manufacturers play an important role in the competitiveness of American industry. They comprise the bulk of manufacturing establishments, are integral parts of the supply chain for both commercial and defense products, and provide approximately 40 percent of manufacturing employment.

Many of these smaller firms, however, are operating far below their potential. Their use of modern manufacturing equipment, methodologies, and management practices is inadequate to ensure that American manufacturing will be globally competitive.

1  

Typically defined as those with fewer than 500 employees.



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Learning to Change: Opportunities to Improve the Performance of Smaller Manufacturers Executive Summary Manufacturing firms—large and small—face massive change and adjustments as they move from a stable, fault-tolerant environment of long production runs to a volatile world in which production runs are short, product characteristics are constantly changing, and defect-free on-time production at decreasing prices is a condition for survival. The necessary changes in the organization of production include everything from the layout of the shop floor to the distribution of authority between managers and workers. The magnitude of these transformations threatens to overwhelm the managerial capacities of firms regardless of their size. These dramatic changes in the requirements for successful manufacturing are happening during a period of steady increase in the number of smaller industrial firms1 and a trend toward facilities with fewer workers. Smaller manufacturers play an important role in the competitiveness of American industry. They comprise the bulk of manufacturing establishments, are integral parts of the supply chain for both commercial and defense products, and provide approximately 40 percent of manufacturing employment. Many of these smaller firms, however, are operating far below their potential. Their use of modern manufacturing equipment, methodologies, and management practices is inadequate to ensure that American manufacturing will be globally competitive. 1   Typically defined as those with fewer than 500 employees.

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Learning to Change: Opportunities to Improve the Performance of Smaller Manufacturers This situation has prompted significant public response. State and local governments have created industrial assistance services, the federal government has multiple programs aimed at helping small businesses, and there is strong interest in the Clinton administration in creating a national network of industrial assistance centers (Clinton and Gore, 1993). Expanding the National Institute of Standards and Technology (NIST) Manufacturing Technology Centers (MTCs) program is one mechanism for creating such a national assistance network. Other possible mechanisms, described in the Advanced Research Project Agency's recent Technology Reinvestment Project (TRP) information package, include Advanced Technology Centers at community colleges, industry specific consortia, and expansion of state-based industrial extension services (U.S. Department of Defense, 1993). Although the specifics of a national industrial assistance system have yet to unfold, it is clear that significant resources—the budget for manufacturing extension programs in the TRP is about $180 million for fiscal year 1993—are being mobilized to create a national industrial assistance system. Given this context—rapid changes in manufacturing, growth in the numbers of smaller manufacturers, and their apparent lag in modernization effort—NIST asked the Manufacturing Studies Board to form a committee to examine the barriers to manufacturing improvement in smaller firms and to identify the appropriate role of the MTCs in addressing those barriers. As part of its study efforts, the committee met with nearly one hundred small manufacturing owners/managers, as well as extension service field agents and managers from Manufacturing Technology Centers (MTCs), state extension programs, universities, and trade associations. In addition to discussing barriers facing smaller manufacturers, both company representatives and assistance providers discussed opportunities to help firms overcome these barriers and to improve significantly their production costs, quality, and market responsiveness. The conclusions and recommendations of the committee are based on a review of relevant literature and the testimony of experts, practitioners, assistance agents, private sector service providers, and the many manufacturing owners and executives that participated in eight workshops held throughout the United States. The recommendations of the committee reflect the changed circumstances that have resulted from the emergence in early 1993 of substantial additional federal funding for industrial assistance activities, as well as President Clinton's proposals for the creation of a national network of manufacturing extension centers.

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Learning to Change: Opportunities to Improve the Performance of Smaller Manufacturers PROBLEMS AND CHALLENGES FOR SMALLER MANUFACTURING COMPANIES Smaller companies confront major problems in responding to increased global competition. These problems encompass a broad range of issues, only some of which relate directly to technology. Inadequate resources—people, money, expertise, information—and insufficient time are reasons that many smaller firms are not improving their manufacturing performance. The idiosyncracies that come from the genesis of entrepreneurial companies are also contributing factors in their resistance to change and slow adoption of more advanced technologies and new organizational structures. Five fundamental barriers to manufacturing performance improvement in smaller firms were identified and discussed during the workshops hosted by the committee. The barriers are well corroborated in the extensive literature about conditions in smaller companies. The means for helping firms adequately deal with the problems include a combination of approaches undertaken by MTCs, various state assistance programs, and several private sector service providers. A comprehensive response to most of the barriers will require a combination of the approaches discussed. Barrier 1: Disproportionate Impact of Regulation The regulatory environment creates a disproportionate burden for smaller firms. National, state, and local initiatives and decisions concerning trade, the environment, employment, work place safety, health care, and liability have a direct impact on the competitiveness of manufacturing companies. Despite efforts to lessen the impact of regulatory actions on small businesses, the amount of time and effort required to comply with complex regulations has become a disproportionate hardship for smaller organizations. One result is that the economic impact of regulatory compliance is much greater as a percentage of capital investment than it is for larger businesses. Opportunities for improving the ability of smaller manufacturers to cope with regulatory actions include: improved dialogue between regulators and smaller manufacturers; one means for improving dialogue between regulators and smaller

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Learning to Change: Opportunities to Improve the Performance of Smaller Manufacturers businesses would be to provide assistance in identifying and filing appropriate forms and documents required by regulatory agencies; timely information to manufacturers about new or modified regulations; and reorientation of the strategies of regulatory agencies towards "compliance assistance" rather than "adversarial and punitive." Barrier 2: Lack of Awareness Smaller manufacturers are often unfamiliar with changing technology, production techniques, and business management practices. The staff and senior managers of smaller manufacturing companies must devote most of their time and energies to managing the day-to-day operations of the firm. As a consequence those companies are less likely to be aware of the best manufacturing practices, innovative application of new technologies, and fresh approaches to improved production efficiency. With less relevant experience and expertise, their expectations for successfully selecting and effectively assimilating new technology are not high, and so they are less likely to risk investment in new ways of doing things or in major changes to the management structure and relationships within the business. Opportunities for increasing the awareness of manufacturers to new technologies and best manufacturing practices include providing: national benchmarking data for smaller firms, and illustrative cases of best manufacturing practices; greater access to video tape libraries that illustrate technologies and implementation problems; local and regional forums and workshops; low-cost seminars and formal courses on selection, adoption, and management of specific technologies; and expanded mechanisms to provide access to equipment for "try before you buy." Barrier 3: Isolation Smaller manufacturers are generally isolated and have too few opportunities for interaction with other companies in similar situations. Interaction with other firms is essential to continuous

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Learning to Change: Opportunities to Improve the Performance of Smaller Manufacturers improvement. These associations seem to be most productive when they occur among companies of similar size and with larger organizations that might be role models for smaller firms. The chance for suppliers to interact with major customers, to benefit from membership in a supplier improvement program or keiretsu-like confederation of companies, can significantly increase the chances for smaller firms to improve their performance. Opportunities for increasing the interaction and exchange of information with other manufacturers in like circumstances include: workshops, meetings, site visits, focus groups, forums, and roundtable discussions; television and video programs to expose manufacturers to specific problems and the solutions adopted by other firms; construction and operation of networks of companies with similar interests and needs to share costs; encouraging professional and trade associations to be more active in determining needs and developing appropriate programs for their membership; and electronic networks that provide bulletin boards for direct exchange of information and sharing of approaches to common problems. Barrier 4: Where to Seek Advice It is difficult for owners and managers of smaller companies to find high-quality, unbiased information, advice, and assistance. When companies need help with technical problems, when they want to replace production or design equipment, or when they want to upgrade the skills and talents of their work force, they are often at a loss for sources of assistance. Searching for help in the public sector often reveals a confusing uncoordinated array of services—universities, economic development groups, technical schools, government agencies—" competing" for clients. Inappropriate choices can waste precious resources and time, a waste that smaller firms cannot afford. Opportunities for helping smaller manufacturers acquire necessary information and unbiased advice include: databases of consultants with relevant references and qualifications, toll-free numbers to provide firms with a single contact for

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Learning to Change: Opportunities to Improve the Performance of Smaller Manufacturers assistance, and electronic bulletin boards to notify service providers of opportunities in the manufacturing community; field engineers that provide small companies a strategic perspective on how they compare to competitors and what changes they need to make to remain competitive in the long term; and interpreters and catalysts to communicate the needs of smaller manufacturers to vendors, suppliers, academic institutions, federal laboratories, and government agencies. Barrier 5: Scarcity of Capital Operating capital and investment funds for modernization are difficult for small and medium-sized manufacturing firms to obtain. The financial community does not readily understand manufacturing and often perceives loans for new equipment as unattractively high risks. Smaller firms are unlikely to have the capabilities needed to put together proposals for funds in the format familiar to lending officers. The consolidation of banks, with some exceptions, has removed much of the decision making from the communities where many loan officers have traditionally relied on the "known character" of management and owners of the companies in lieu of collateral. Opportunities for improving access to capital and understanding the requirements of the financial community include: local and regional forums and workshops for bankers, regulators, and others who work with manufacturers; assistance developing justification for capital improvements in the format and language understood by the financial community; and creation of mutual loan guarantee networks among peer companies. SOURCES OF ASSISTANCE Fortunately, the efforts of many assistance organizations, educational institutions, and businesses have demonstrated ways to help companies successfully contend with most of these obstacles. With some regional variation, assistance is available in both the private and public sectors. The private sector offers a number of resources that manufacturers can buy to solve problems, to modernize their production operations, and

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Learning to Change: Opportunities to Improve the Performance of Smaller Manufacturers to upgrade the skills of their workers. Among these are consultants, suppliers of technology, trade associations and professional societies, and other miscellaneous service providers. The backgrounds and expertise of many consultants are, however, primarily founded on principles relevant to larger corporations; they often fail to appreciate subtle but important differences in smaller organizations. And though many suppliers will provide fairly substantial "proposal engineering" services while competing for a sale, fewer are able to follow through with sustained support and service after a sale to a relatively small customer. There are no precise data available on the number of smaller companies buying private sector assistance. Numerous initiatives have been undertaken at the federal, regional, state, and local levels to help manufacturers and business in general. For the most part, these initiatives have become overlapping uncoordinated programs, and the effectiveness of many programs has yet to be systematically evaluated or demonstrated. The programs typically operate on fragile financial underpinnings and often compete for funds to support assistance efforts. The availability of public assistance, which is usually dependent on funding by state and local government, tends to vary with the perceived contribution of smaller manufacturing firms to the wellbeing of the local economy, and the best state programs are unable to help more than a few hundred firms per year. Until 1989, the federal role in providing assistance to small manufacturers was primarily through the Small Business Administration and various defense programs. Beginning in 1989, however, the National Institute of Standards and Technology (NIST) has funded the Manufacturing Technology Centers (MTCs), seven of which are now operating. The MTC program is the primary federal activity in industrial extension providing matching grants for creating centers to enhance "productivity and technological performance in U.S. manufacturing through the transfer of manufacturing technology and techniques . . ." (U.S. Congress, 1988). EFFECTIVENESS OF MANUFACTURING TECHNOLOGY CENTERS To understand the challenges facing smaller manufacturers and to determine the nature and effectiveness of MTC activities, the committee held eight workshops throughout the United States, six of them at MTCs. The conclusions of the committee concerning the effectiveness of the

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Learning to Change: Opportunities to Improve the Performance of Smaller Manufacturers organizations are based on workshop discussions with smaller manufacturers and company representatives who had some experience working with the Manufacturing Technology Centers, as well as conversations with MTC staff and other service providers. A majority of the committee has concluded that the MTCs are well placed to provide many of the services needed to improve the performance of smaller manufacturers. However, the committee found that the legislative "sunset provisions," which eliminate NIST funding after six years, and the present metrics (cash flow, number of clients, length of engagements, attendance at manufacturing meetings) tend to adversely dominate the missions, attitudes, and behaviors of the MTCs that have been operational for two or more years. While there is an extensive range of services that can be offered by MTCs, the typical long-term strategies to fill the funding gap and comply with performance measures place increasing emphasis on fee-for-service activities. Many of the needs and opportunities identified by the manufacturers attending the workshops were not project-oriented kinds of assistance but were, instead, concerned with improving access to information and building stronger networks among companies, suppliers, technology developers, regulators, and financiers. These "soft" services were noted repeatedly as some of the most useful and important contributions that could be made by the MTCs as neutral parties. Such services, however, are not easily converted into fees, and their contribution to the accomplishment of the MTC mission is difficult to measure. All of the MTCs provide these kinds of "soft" services to a greater or lesser degree, but they should receive more emphasis despite the lack of clear metrics on which to judge their value. The committee can foresee a situation emerging in which MTCs fail to provide services that would be most useful and effective to smaller firms because the fee income is insufficient, while at the same time competing more with private sector service providers for the business of larger firms. Each of the MTCs continues to learn how best to serve its customer base and is flexible enough to adapt. The local infrastructure and industrial economy determine to a great degree the characteristics of the MTC organization and its chosen position in the spectrum of support needed by manufacturers in its region. This drives each MTC to develop a unique combination of services targeted at local industrial conditions, and subsequently each evolves a relatively unique relationship with other providers of services and assistance. They are learning how to serve as a hub of information and facilitator of cooperation in their local industrial communities, and how to amalgamate a range of programs into a core set

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Learning to Change: Opportunities to Improve the Performance of Smaller Manufacturers of useful services. Each MTC, therefore, can be viewed as an experiment or prototype in how to integrate federal efforts in manufacturing assistance with existing private and public assistance resources to meet the demands of very diverse local manufacturing communities. CONCLUSIONS The investigations and deliberations of the committee have led to the development of opposing sets of conclusions concerning the appropriateness of a federally funded national system of manufacturing assistance. The majority opinion and recommendations are presented followed by the minority opinion. Majority Opinion Based on the committee's discussions with smaller manufacturers and with staff at the MTCs and other industrial assistance programs, a majority of the committee has concluded that a national industrial assistance system is justified. The committee majority has concluded that barriers to manufacturing performance improvement in smaller firms and the opportunities to overcome those barriers, as described by manufacturers in the committee's workshops, define roles for public sector assistance programs. The majority assessment of the current MTCs is that the MTCs are well-placed to address many of the challenges confronting smaller manufacturers. Within the fragmented network of assistance sources, the MTCs have begun to carve a niche that, at least within their geographic regions, has brought some degree of order to the community and has raised the awareness of smaller companies that useful help is available. The MTCs are still experimenting with different mechanisms for marketing, ensuring responsiveness to the local customer base, working with other sources of assistance, and building the intercompany networks and information resources that many smaller firms need. This process of experimentation and learning should be encouraged and the lessons broadly disseminated. This is the only way to increase effectiveness in a necessarily diverse environment and to keep expectations realistic as the MTC program is expanded and other initiatives begin in the context of a national manufacturing assistance system.

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Learning to Change: Opportunities to Improve the Performance of Smaller Manufacturers Minority Opinion Two members of the committee strongly oppose the concept of federally funded assistance to manufacturers through organizations such as the NIST Manufacturing Technology Centers. To a large degree, the disagreement is ideological. In their opinion, government intervention is more costly and less efficient than natural market forces. They feel strongly that this report should not be treated as a blanket endorsement of a national industrial policy. Their interpretation of the results is to resist the temptation of a national cure-all. The full text of the majority opinion can be found in Chapter 6, page 95. RECOMMENDATIONS The committee majority offers the following recommendations to help guide the implementation of such a national program. 1. Develop a long-term strategy. Efforts to create a national system of industrial assistance to improve the manufacturing performance of smaller companies should recognize the importance of creating a coherent system and not just increasing the number of assistance facilities and service providers. A long-term strategy for deploying, operating, and funding a national system, in the context of changing economic and political realities, must be developed. 2. Expansion should be governed by "quality, not quantity." Too rapid expansion of the MTC program or other forms of industrial assistance programs risks compromising service quality for three reasons: 1) attempts to anticipate appropriate needs based on present knowledge and understanding will not be effective, 2) rapid replication of a single uniform model of an assistance center is inappropriate, and 3) the number of organizations available and capable of providing high-quality assistance is relatively small. Recognizing these constraints, the committee recommends that expansion of the current MTC program and other federal initiatives should be planned carefully with the aim of developing a comprehensive

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Learning to Change: Opportunities to Improve the Performance of Smaller Manufacturers national industrial extension system within 3 to 5 years, based on a strategy of "learn as we go." 3. A national system of industrial assistance must strive for balance among local responsibility, regional coordination, and national direction, support, and cohesion. The combination of rapid changes taking place in manufacturing and major differences across industries and localities calls for a system with centralized coordination and decentralized, distributed management and control. National goals and objectives must be tempered by the environment of each locale, and regional efforts should respond as appropriate for their predominant industrial sectors, private and public resource base, and real potential for matching funds. Local and regional programs must have the ability to implement change and to deliver services in the most effective, efficient way for the demands of their local customers. 4. Federal financial support should recognize different needs, abilities, and capacity to apply funds effectively. It should focus on spending modest amounts wisely, with flexibility in the amount of funds for which an organization must apply. Rigid criteria that constrain competitive awards to high, fixed levels often discourage applications for programs which, appropriately, should be smaller scale efforts. Funding support should fit the abilities of organizations to use the money effectively, and awards should be commensurate with the size of the market for assistance, availability of matching funds, and other resources. 5. Coherent measures and guidelines should be developed for evaluation of federal, regional, and local assistance efforts. For programs that are not performing, remedial action needs to be taken quickly by a local board of directors. The set of metrics for evaluating accomplishments of the programs must be tied to their missions, and the connections between those metrics and goals must be clear. Evaluation of the services provided to manufacturing clients must be an integral part of the overall judgement process.

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Learning to Change: Opportunities to Improve the Performance of Smaller Manufacturers This evaluation should be administered by a governing or advisory board with broad membership, particularly local industry participation. 6. A consistent and coherent funding policy, accompanied by appropriate metrics for evaluating performance, should be established to assure a stable assistance environment. Current MTC funding policies requiring local matching funds and elimination of federal funding after six years can be counterproductive to the goals of a national system of industrial assistance. Self-sufficiency of the MTC organizations, while not competing with the private sector, has a low probability of success. Consequently, reliance on user fees alone is not an appropriate basis for supporting necessary assistance activities, and continuing support should be available to manufacturing assistance programs that meet the performance criteria for continued funding. 7. Periodic self-examination of all the elements of a national system for manufacturing assistance is essential to remain flexible and adaptable in the face of rapid changes in the manufacturing base. Any assistance system must be able to examine its own effectiveness and adjust specific objectives as circumstances change. Periodically, the specific objectives and certainly the metrics for measuring performance need to be reviewed because the issues that will challenge manufacturers in the future are not readily discerned from the environment they face today. Whatever kind of support and performance improvement system is designed must, therefore, incorporate the means for evolving the services and delivery mechanisms to accompany the new challenges and conditions that will confront manufacturers. 8. Long-term political support is essential. An infrastructure to help significantly improve the manufacturing competitiveness of smaller companies must have consistent support and visibility in the political process that go beyond partisan politics. Strong management of the federal effort is essential. The Department of

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Learning to Change: Opportunities to Improve the Performance of Smaller Manufacturers Commerce has the appropriate background to understand the issues, formulate a coherent strategic vision, and attract the necessary resources to accomplish the national goal of strengthening U.S. manufacturers. The Department of Commerce should be given responsibility for undertaking the coordination and rationalization of the broad, and largely disjointed, federal effort now under way to help American manufacturers improve their performance and global competitiveness. It is crucial that the resources made available for such assistance efforts, whether through the MTC and other programs at NIST, other programs in the Department of Commerce, or programs in the Department of Defense and other agencies, be applied in an efficient and rational manner to maximize the benefits to American industry. Because the MTC program is, and will continue to be, a federal-state partnership, and because state governments have been leaders in establishing industrial assistance programs, the need to maintain state political support cannot be understated. By helping to provide the regional and local input essential to effective assistance programs, states play a critical role. SUMMARY The purpose of publicly provided technical assistance is not to absolve manufacturers of responsibility for their success. The immediate purpose is to provide attention to the issues and problems that threaten survival of smaller manufacturers by helping them manage the set of challenges with which they are presently confronted. The long-term goals of public support should be to create an environment in which companies can learn to help themselves and encourage the growth and development of private sector resources by identifying needs, defining appropriate services, and strengthening market efficacy. Improvements in technology and changes in the firm's internal organization of work are but elements in overcoming the challenges and barriers that block or impede the development of globally competitive manufacturing capabilities in smaller U.S. firms. Innovation within our manufacturing companies must be understood as inextricably linked to, and dependent on, macroeconomic initiatives, trade impediments, antitrust concerns, education and training, energy, regulatory actions, public infrastructure, cost and availability of capital, and a host of other external factors and policies that are beyond the immediate control or direction of individual firms.

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