II
Small and Medium-Sized Manufacturing Enterprises in Integrated Supply Chains

The supply chain in 2020 dominates the manufacturing landscape, with hardware and components manufactured by a whole new tier of job shops and specialty houses—virtual corporations made up of groups of knowledge workers (Owen, 1999).

SMEs cannot ignore the supply chain revolution and remain competitive. Although the outsourcing trend is providing increased opportunities for suppliers, trends toward globalization and increased supply chain integration pose serious challenges. Part II of this report discusses these trends, describes their effects on SMEs, and suggests strategies for achieving competitive advantage.

Each SME selects or creates the supply chains in which it participates. A comparison of the differences between the requirements for participation in OEM supply chains and the unique capabilities of an SME and its own supply chains often reveals deficiencies or gaps the SME must address. In Chapter 5, the committee identifies some of the capabilities of SMEs, based on survey data. Chapters 6 through 10 address specific requirements, constraints, and capability gaps that SMEs must address to succeed. Competitive cost, quality, service, and delivery are the traditional fundamental capabilities required of any supplier, but successful participation in today's integrated supply chains requires more. Technology and management skills, for example, are becoming



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Surviving Supply Chain Integration: Strategies for Small Manufacturers II Small and Medium-Sized Manufacturing Enterprises in Integrated Supply Chains The supply chain in 2020 dominates the manufacturing landscape, with hardware and components manufactured by a whole new tier of job shops and specialty houses—virtual corporations made up of groups of knowledge workers (Owen, 1999). SMEs cannot ignore the supply chain revolution and remain competitive. Although the outsourcing trend is providing increased opportunities for suppliers, trends toward globalization and increased supply chain integration pose serious challenges. Part II of this report discusses these trends, describes their effects on SMEs, and suggests strategies for achieving competitive advantage. Each SME selects or creates the supply chains in which it participates. A comparison of the differences between the requirements for participation in OEM supply chains and the unique capabilities of an SME and its own supply chains often reveals deficiencies or gaps the SME must address. In Chapter 5, the committee identifies some of the capabilities of SMEs, based on survey data. Chapters 6 through 10 address specific requirements, constraints, and capability gaps that SMEs must address to succeed. Competitive cost, quality, service, and delivery are the traditional fundamental capabilities required of any supplier, but successful participation in today's integrated supply chains requires more. Technology and management skills, for example, are becoming

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Surviving Supply Chain Integration: Strategies for Small Manufacturers critical. The requirements and capabilities identified in these chapters are demanded in various combinations and on various time scales depending on the industry and the specific needs of the supply chain. Some SMEs have been thriving in this new environment. After interviewing executives from a number of successful SMEs, the committee identified the characteristics that make them successful (Chapter 11). Chapter 12 introduces a variety of resources to help SMEs overcome their constraints and fill their capability gaps. Competing demands can create difficult investment choices for SMEs that participate in multiple chains. Selecting the right technologies can be critical for success. The associated costs of new technologies come early, have a 100 percent probability of occurring, and are generally easy to measure. The benefits, including savings and increased competitiveness, however, come later, may not be fully realized, and are sometimes difficult to measure. Nevertheless, an unwillingness to invest, take risks, and reposition the enterprise in response to the evolving business environment may lead to business failure. Faced with the simultaneous challenges of buying from large suppliers with concentrated market power and selling to equally large and powerful OEMs or prime defense contractors, SMEs may feel as though they are being squeezed in a vise. The challenge to the small manufacturer is to find ways to participate successfully under these conditions. Because of the tremendous diversity of integrated supply chain requirements and SME capabilities, there can be no universal formula for SME success. However, the recommendations presented in the following chapters, properly applied, can improve the odds for SME competitiveness and profitability.

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Surviving Supply Chain Integration: Strategies for Small Manufacturers 5 Capabilities of Small and Medium-Sized Manufacturing Enterprises This chapter presents the results of three surveys, one conducted by the committee, the other two conducted by the Georgia Manufacturing Extension Alliance, to identify trends in the evolving capabilities of SMEs. Although the sizes, industries, and supply chain requirements of the participants vary greatly, the results reveal gaps that must be addressed by SMEs if they are to remain competitive. COMMITTEE SURVEY In the summer of 1998, the committee administered a questionnaire to 99 SMEs (1) to gain a better understanding of the current practices and capabilities of SMEs involved in supply chain integration and (2) to identify potential shortfalls in these capabilities. The questionnaire and a summary of the data can be found in Appendix A. The first level of analysis was conducted on the total sample. Subsequent analysis focused on responses as a function of annual revenues and the concentration of the customer base. First-Level Analysis and Observations The use of electronic business transactions between customers and SMEs was very limited. Only 11 percent of customers placed orders electronically, but the data was greatly skewed by a few "large" SMEs with electronic capabilities. Thus, although electronic data interfaces and Internet ordering are increasingly cited as important for supply chain

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Surviving Supply Chain Integration: Strategies for Small Manufacturers integration and although large corporations are investing extensively in electronic capabilities, based on this mid-1998 sample, there was still little use of electronic business among SMEs. The extent to which SMEs are dealing with small customers who are less likely to have this capability is not known. The results of the survey may indicate that SMEs need help in terms of investments, technical know-how, and understanding of the value of electronic business transactions. SMEs in the survey were generally better equipped in terms of computer-aided design (CAD); 74 percent had CAD capabilities. Approximately half reported using SPC, computer-aided manufacturing (CAM), materials and resource planning (MRP), and hazardous material (HAZMAT) handling capabilities. Although only 41 percent were certified by the International Standards Organization (ISO), SMEs clearly felt that ISO certification was important; 35 percent of the respondents reported plans to obtain certification. SMEs characterized relationships with their customers as somewhat more "partner-like" than "adversarial," although it appears from the data that there is substantial room for improvement in this area. The SMEs considered early involvement in product development, receiving production forecasts from customers, and sharing performance data to be very important. They reported less of a need for improvement in payment terms, supplier recognition programs, sharing of cost data, and financing. The implication was that SMEs worry less about operations over which they have control and more about factors that are dependent on customers. Therefore, customers should work more closely with SME suppliers in the areas of product development, information sharing, and performance data feedback. Analysis Based on Size and Customer Concentration The median annual sales of survey participants was $7.7 million. The committee divided the sample into two equal parts: SMEs with annual sales above the median ("large") and SMEs with sales below the median ("small"). The committee also assessed differences in survey results between SMEs with a higher concentration of major customers (i.e., more than 34 percent of sales from their top three customers) and companies with a more dispersed customer base (i.e., less than 34 percent of sales from their top customers). The survey indicated little difference between large and small SMEs in the percentage of customers ordering electronically, indicating, perhaps, that customers were still in the process of adopting these capabilities. Large SMEs considered customer sharing of future product and technology plans slightly more important than small SMEs. Large SMEs

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Surviving Supply Chain Integration: Strategies for Small Manufacturers TABLE 5-1 Use of Manufacturing Technologies and Techniques, 1996 and 1994   1996 1994 Technologies and Techniques Current Use Planned Use Current Use Planned Use PCs, non-manufacturing 96.1% 1.2% 90.6% 3.6% Material requirements planning (MRP II) 58.5% 27.1% 56.1% 28.2% Just-in-time manufacturing (JIT) 58.2% 14.5% 61.7% 14.2% Preventive maintenance 53.6% 28.3% 59.2% 28.3% Local area networks (LANs) 51.0% 13.9% 31.7% 18.3% Employee teams 49.3% 25.1% 52.8% 26.6% PCs, shop floor 45.0% 23.2% 36.6% 25.7% CAD with computer-aided engineering (CAE) 43.8% 11.2% 39.4% 15.7% Internet 38.2% 30.5% n/a n/a SPC and statistical quality control (SQC) 37.5% 20.5% 36.2% 23.9% Electronic business transactions 37.0% 32.0% 35.2% 29.8% Numerically controlled (NC) or computer numerically controlled (CNC) machines 28.8% 8.6% 28.6% 7.6% Data collection devices 27.2% 32.5% 23.1% 31.6% CAD with CAM 23.0% 10.7% 17.0% 13.2% Manufacturing cells 19.2% 10.2% n/a n/a Computer-integrated manufacturing (CIM) 16.1% 17.1% 10.2% 20.3% Automated material handling 15.7% 18.8% 17.0% 20.2% ISO 9000/QS 9000 certification 13.9% 28.9% 4.2% 36.6% Automated in-process inspection 11.1% 16.6% 8.9% 15.9% Rapid prototyping 10.2% 9.7% n/a n/a Distance learning 5.6% 19.3% n/a n/a ISO 14000 certification 1.1% 16.6% n/a n/a   Source: Youtie and Shapira, 1997.

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Surviving Supply Chain Integration: Strategies for Small Manufacturers TABLE 5-2 Use of Technologies and Techniques by Facility Employment Size, 1996   Number of Employees Technologies and Techniques All Respondents 10 to 49 50 to 499 500+ PCs, non-manufacturing 96% 94% 98% 100% JIT customers 58% 52% 64% 76% MRP II 58% 51% 66% 85% Preventive maintenance 53% 49% 57% 77% LANs 51% 40% 63% 79% Employee teams 49% 36% 63% 90% PCs, shop floor 45% 32% 57% 88% CAD, CAE 44% 35% 51% 85% Internet 38% 38% 37% 55% SPC, SQC 38% 22% 52% 87% Electronic business transactions 37% 29% 46% 64% NC, CNC 29% 25% 33% 34% Data collection devices 27% 12% 42% 76% CAD; CAM 23% 19% 25% 48% Manufacturing cells 19% 13% 26% 34% CIM 16% 11% 21% 40% Automated material handling 15% 9% 21% 49% ISO 9000/QS 9000 certification 14% 7% 20% 40% Automated in-process inspection 11% 6% 14% 42% Rapid prototyping 10% 9% 12% 13% Distance learning 5% 2% 7% 26% ISO 14000 certification 1% 0% 1% 8%   Source: Youtie and Shapira, 1997. reported greater SPC, CAD, CAM, MRP, ISO, and HAZMAT capabilities. Small SMEs considered improvements in payment terms and financing somewhat more important than did large SMEs. There were few differences between SMEs as a function of concentration of top customers, although a distinct difference was found in the percentage of electronic transactions. SMEs with higher concentrations of top customers had a higher percentage of electronic transactions (15 percent) than those with lower concentrations (7 percent).

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Surviving Supply Chain Integration: Strategies for Small Manufacturers GEORGIA TECH ECONOMIC DEVELOPMENT INSTITUTE SURVEYS Studies conducted in 1994 and 1996 by the Georgia Manufacturing Extension Alliance, through the Georgia Tech Economic Development Institute, confirmed many of the findings of the committee's survey. The Georgia Tech studies surveyed the manufacturing needs, practices, and performance of all manufacturing firms in Georgia with 10 or more employees. The approximately 1,000 responses are summarized in Tables 5-1 and 5-2. Most of the technologies and techniques in the Georgia surveys are identified elsewhere in this report as becoming increasingly important for successful participation in integrated supply chains. Some of the findings of all three surveys were confirmed by a survey reported in The Wall Street Journal, which showed that in 1999 only half of small businesses (defined as having 10 or fewer employees) had Internet access, and approximately 20 percent had their own Web sites. Another survey in 1999 showed that 54 percent of small businesses and 62 percent of medium-sized businesses (defined as having at least 100 employees) had some corporate Web presence (Wall Street Journal , August 17, 1999). Finding. Survey data shows that the manufacturing world is changing rapidly and that small SMEs are significantly behind their larger counterparts in advanced technical capabilities.