Thus, SMEs can provide a wealth of value if they are used effectively in integrated supply chains.

The term "SME" in this report refers only to those small and medium-sized companies actively involved in manufacturing that serve as suppliers to higher tier suppliers or to original equipment manufacturers (OEMs) (i.e., manufacturers that build products for end users rather than components for use in other products). SMEs vary greatly in terms of size, industry, capabilities, and financial strength. They range, for example, from sophisticated 500-person operations that design and fabricate electronic products to several-person local machine shops.

The nature of business competition is changing rapidly and with it the supply chains that support OEMs. In response to competitive pressures, U.S. manufacturers are purchasing increasing amounts of goods and services from outside suppliers and are increasing their efforts to integrate their supply chains to improve performance. A 1998 survey found that 80 percent of manufacturers have formal supply chain management programs or plan to start them in the next year (Manufacturing News, 1998). In this context, the Manufacturing Extension Partnership (MEP) of the National Institute of Standards and Technologies (NIST) and the Robert C. Byrd Institute (RCBI) requested that the National Research Council study the new roles and challenges for SMEs resulting from increasing supply chain integration. The Committee on Supply Chain Integration, formed under the direction of the Board on Manufacturing and Engineering Design, was asked to perform the following tasks:

• Identify and analyze state-of-the-art supply chain integration concepts.

• Define the requirements for successful SME participation in integrated manufacturing supply chains.

• Define the gaps between the requirements and capabilities of SMEs.

• Suggest strategies to assist SMEs in developing the capabilities necessary for successful participation.

Despite the strong overall trend toward increased supply chain integration, the extent of integration varies greatly from industry to industry. Defense industries, for example, are not allowed to make decisions based on the overall good of supply chains until changes have been made in the Federal Acquisition Regulations (FAR) and contract law. Contract law, especially in accordance with FAR, flows down fiduciary responsibility (i.e., each supplier is directly accountable for its portion of