11
Requirements and Characteristics of Successful Small and Medium-Sized Manufacturers

EVOLVING REQUIREMENTS

Because the business environment and product requirements keep changing, the requirements imposed on suppliers and the processes of supply chain building and integration are also changing. Young industries typically focus on providing new, innovative products, and their supply chains must be flexible enough to respond to rapid changes in technology and market demand. As the industry matures, the primary basis of competitive advantage shifts to other capabilities, such as marketing and distribution. As the industry continues to mature, the emphasis typically evolves toward cost saving, a limited product array, high levels of customer service, and improved manufacturing practices. Thus, SMEs must evolve the focus of their enterprises in a manner compatible with the phases of the industries they serve.

The roles of technology evolve in a similar manner. For instance, during the first 70 years of automobile manufacturing, electrical systems played a subordinate role. Design and fabrication of the metal structure constituted the core technology, and electrical devices were considered secondary. Today, the cost of automotive electronics exceeds the cost of the steel structure. These changes have led to parallel changes in the required competencies and associated business opportunities for SMEs. Thus, suppliers must be constantly aware of changing requirements and opportunities.

The business environment in most industries is evolving far more rapidly than ever before, and competitors elsewhere in the world are



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Surviving Supply Chain Integration: Strategies for Small Manufacturers 11 Requirements and Characteristics of Successful Small and Medium-Sized Manufacturers EVOLVING REQUIREMENTS Because the business environment and product requirements keep changing, the requirements imposed on suppliers and the processes of supply chain building and integration are also changing. Young industries typically focus on providing new, innovative products, and their supply chains must be flexible enough to respond to rapid changes in technology and market demand. As the industry matures, the primary basis of competitive advantage shifts to other capabilities, such as marketing and distribution. As the industry continues to mature, the emphasis typically evolves toward cost saving, a limited product array, high levels of customer service, and improved manufacturing practices. Thus, SMEs must evolve the focus of their enterprises in a manner compatible with the phases of the industries they serve. The roles of technology evolve in a similar manner. For instance, during the first 70 years of automobile manufacturing, electrical systems played a subordinate role. Design and fabrication of the metal structure constituted the core technology, and electrical devices were considered secondary. Today, the cost of automotive electronics exceeds the cost of the steel structure. These changes have led to parallel changes in the required competencies and associated business opportunities for SMEs. Thus, suppliers must be constantly aware of changing requirements and opportunities. The business environment in most industries is evolving far more rapidly than ever before, and competitors elsewhere in the world are

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Surviving Supply Chain Integration: Strategies for Small Manufacturers combining low-cost labor with improving education, communications, and transportation capabilities to compete for roles in OEM supply chains. For instance, in 1997, a New York apparel manufacturer advertised a spring fashion line on his Web site. Within days he had five orders from Beijing. The manufacturer at first savored the irony that China, a growing source of garments sold in the United States, was buying from New York. Soon, however, he began to suspect that his garments had been bought to be copied. Suspiciously similar dresses with "Made in China" labels flooded the market within a month (Kanter, 1998). Thus, U.S. SMEs can lose their competitive position virtually overnight. Although changes like these have not yet affected all industries or all levels of supply chains, competing in fast-moving environments will require new strategies. Departments and functions within the corporation and throughout the supply chain must work simultaneously, rather than sequentially, on projects. The feedback loop between the marketplace, designers, manufacturers, and the sales force must be shortened so that products can be developed and transitioned to manufacturing faster and introduced simultaneously into markets around the world. Electronic data interchange capabilities may be required to enable key supply chain functions to respond simultaneously to changes in customer demand. Flexible or agile manufacturing may be needed for rapid responses to changes in demand, timely resolution of quality problems, and fast implementation of new product features. SMEs will have to assess their future roles carefully and may have to reposition themselves rapidly to remain competitive. In some cases they will have to make fundamental decisions about whether to (1) accept the risks associated with investing and transforming the company (see the Case Study below); (2) sell the business while it still has some value; or (3) operate the business essentially as is until it fails. Recommendation. Small and medium-sized manufacturing enterprises must reassess their competitive positions and those of their supply chains on a regular basis and position themselves to respond rapidly to changing conditions. Case Study: Astronics Corporation's Repositioning Strategy Astronics Corporation, an SME headquartered in Buffalo, New York, operates in two distinct business segments: specialty packaging and aerospace electronics. In the 1980s, the packaging segment served as a regional supplier of custom folding boxes. The electronics 'segment has been selling primarily to higher tier aerospace and defense suppliers and to OEMs. Astronics' revenues in 1986 totaled $17 million.

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Surviving Supply Chain Integration: Strategies for Small Manufacturers Physical proximity had been a valuable differentiator for the folding box supplier in terms of shipping costs and face-to-face contact. As this commodity business became increasingly competitive, Astronics sought to differentiate itself and add value by investing in capabilities that enabled it to pursue markets in short-run specialty packaging and high value-added consumer products. The company invested heavily in innovative production technologies, including lasers and water-jet cutting. It also converted to computerized plate and die-making equipment, which reduced tooling cycle times by more than 80 percent. These investments, plus the shift in target markets away from low-value commodities, led to substantial increases in revenues and earnings. To maintain this growth, the company plans to consolidate purchasing, invest in new production capabilities, offer a wider range of products, and enter into innovative supply chain alliances with suppliers and customers. The markets served by the aerospace electronics segment are characterized by rapidly changing customer demand (contracts) and by technology changes. To remain competitive, Astronics selects its product development contracts carefully and keeps its technological capabilities up to date. Astronics has carefully invested in the development of this segment by means of acquisitions and internal development. As a result of these efforts in both divisions, 1998 corporate revenues totaled $46 million, an increase of more than 250 percent in 12 years, and profits have increased steadily. Thus, by analyzing the changing business environment, repositioning itself to meet evolving challenges and opportunities, adding value to its products, and judiciously investing in technologies, this SME supplier has been able to grow and prosper (Astronics Corporation, 1995, 1998). CHARACTERISTICS OF SUCCESSFUL SMALL AND MEDIUM-SIZED MANUFACTURING ENTERPRISES The committee interviewed executives of several successful SMEs in an attempt to identify common characteristics that are essential for success. The SMEs, which ranged in size from $2 million to $50 million in annual sales and had 30 to 450 employees, were selected because they have viable businesses, strong customer bases, and positive out-year projections for sales and profits. Based on these interviews and the experience of the committee, successful SMEs have several characteristics in common, which are discussed below. Evaluation of Customers Successful SMEs are good at selecting customers. To a considerable

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Surviving Supply Chain Integration: Strategies for Small Manufacturers degree, the interviewed SME executives had selected the customers with whom they do business and had turned away customers that treated them as adversaries. At first glance, this might seem like an extreme approach for SMEs with only a few customers, but the development of a diversified base of loyal, trusting customers can reduce business risk during hard economic times. The SME executives felt that careful evaluation and selection of customers was one of the most important criteria for success. Because participation in integrated supply chains is increasingly a long-term commitment, customers should be assessed carefully to determine their reliability and the appropriateness and long-term viability of becoming integrated into their chains. Each SME should consider the following questions and create detailed customer evaluation criteria specific to its business needs: Does the customer offer multiyear contracts? Spot buys may be good for short-term revenue, but the benefits of an integrated supply chain can be maximized only when both the customer and SME make long-term commitments. Does the customer practice the principles of successful supply chain integration? How willing is the customer to work with SMEs to improve supply chain processes? Is the customer agreeable to equitable sharing of benefits and burdens? Are the customer's employees evaluated, in part, by how well they interact with suppliers? The SME should determine if the customer has an internal environment conducive to successful integration. In an integrated chain, the SME will have a close business relationship with the customer's employees, and the way they are evaluated will affect how they interact with suppliers. SMEs should also note how the customer treats others, both under normal conditions and under conditions of stress. Successful integration requires that partners be willing and able to work effectively together under all conditions. Is important business information shared openly between customer and supplier? Successful integration depends on sharing information. SMEs should assess the types of information that are shared and the means by which they will flow. Does the customer demand more information than is needed for successful integration? Access to customer schedules and other aspects of their MRP systems can enable an SME to position itself to respond to customer needs. If the available information does not meet the needs of the SME or is not available in a timely and useful form, the likelihood of successful integration should be seriously questioned.

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Surviving Supply Chain Integration: Strategies for Small Manufacturers What forms of communication does the customer require? Because many large OEMs are requiring more data and compatible electronic connectivity with suppliers, SMEs should evaluate the costs of gathering the required data and transmitting it by means of compatible systems. They must determine if these investments are compatible with their long-range plans. What access does the supplier have to the customer's product plans and technology strategies? What are the OEM's expectations with regard to supplier participation in product design and development? To be truly integrated and effective, SMEs must understand the customer's product plans and participate at an appropriate level in product design. To what extent does the customer demand and recognize quality certifications, standards, and processes? Customer requirements should be appropriate for the products being purchased, and the supplier's quality capabilities should be compatible with the customer's needs. Supplier conformance with customer requirements should be recognized and supported by customer actions, such as fewer site audits. Can the customer be profitably served? SMEs should assess requirements for additional investment and the extent to which the customer's needs will be compatible with the needs of its other customers. Assessments of the profitability of serving each customer require the capability to isolate costs by customer or supply chain. Thus, the committee suggests that SMEs consider implementing ABC (activity-based costing). By adopting net present value and return on investment approaches, an SME can quantify and compare the costs of serving various customers and estimate the revenues and profits that will accrue from the relationships. Recommendation. Small and medium-sized manufacturing enterprises should develop and implement customer evaluation and selection criteria, including the following: Opportunities for long-term contracts approach to supply chain integration extent of information sharing required forms of communication access to product and technology plans expectations regarding participation in product design recognition of supplier quality certification whether the customer can be served profitably

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Surviving Supply Chain Integration: Strategies for Small Manufacturers Reaction to Salient Events One key to success identified by all of the SMEs who were interviewed was the ability to recognize and react appropriately to salient events (major events that can define success or failure). For example, one SME, the Texas Nameplate Company, Inc., reported an initial negative reaction when the company was forced to adopt statistical process controls. However, when the benefits of successful implementation were recognized, the SME elected, on its own initiative, to adopt total quality management (TQM) and ISO 9000. It later went on to win the prestigious Malcolm Baldrige National Quality Award. Thus, customer-imposed requirements that may seem onerous in the short term might prove to be beneficial in the long term. Strategic Alliances and Partnerships Successful SMEs create, implement, and maintain strategic plans, which include partnerships and strategic alliances that enable them to meet customer needs better. These alliances should be formalized in documents that define roles and responsibilities. Strategic alliances and partnerships increase the likelihood that the customer will use the SME for future business. Catering to the Customer The SME must cater to the customer's needs, which increasingly include supply chain integration. This means, first and foremost, providing low-cost, high-quality products, effective service, and on-time delivery. SMEs should know their customers intimately at all levels in the organization and cater to specific business needs at each level. Focus on Quality Successful integration requires that supplier quality levels be appropriate to meet the customer's needs and that the attitude toward high quality be instilled in all employees. Treatment of Employees Employees, the interfaces between customers and suppliers, must be educated and trained to meet the skill levels required by increased supply chain integration. SMEs should use incentives to enhance the performance and reinforce the training of employees.

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Surviving Supply Chain Integration: Strategies for Small Manufacturers Selection and Monitoring of Metrics SMEs should identify which aspects of their business should be measured, determine meaningful metrics for measuring progress, and use the information to improve performance. Collecting data is expensive, however, so SMEs should only collect and analyze data that will help to improve business operations. Documentation of Business and Manufacturing Processes Documentation is a foundation for quality. The ability to repeat standard, well documented processes without deviations is crucial for long-term success. Use of the Internet The Internet can be an inexpensive way to meet communications requirements. It also provides opportunities for education, new sales channels, and lower cost procurement. Sharing of Information SMEs should develop the capability to provide accurate, robust data to supply chain partners. Supply chain integration/management software should be chosen carefully. Most of the software is much too complex, expensive, and time-consuming for SMEs.