The business environment is changing rapidly and with it the supply chains of original equipment manufacturers (OEMs). Most OEMs no longer compete solely as autonomous corporations. They also compete as participants in integrated supply chains. In response to competitive pressures, U.S. manufacturers are purchasing increasing amounts of goods and services from outside suppliers (i.e., outsourcing), as well as integrating their supply chains to improve performance. A 1998 survey revealed that 80 percent of manufacturers had formal supply chain management programs or planned to start them in the next year. In this context, the National Institute of Standards and Technologies and the Robert C. Byrd Institute requested that the National Research Council conduct a study of the new roles and challenges faced by small and medium-sized manufacturing enterprises (SMEs) in integrated supply chains. The Committee on Supply Chain Integration was formed, under the auspices of the Board on Manufacturing and Engineering Design, for this purpose.
STATEMENT OF TASK
The committee was asked to perform the following specific tasks:
Identify and analyze state-of-the-art supply chain integration concepts.
Define the requirements for successful participation by SMEs in integrated supply chains.
Identify the gaps between integrated supply chain requirements and the capabilities of SMEs.
Suggest strategies to assist SMEs in developing the capabilities required for successful participation.
This report is intended for the owners and managers of small and medium-sized manufacturing enterprises and for the manufacturing extension centers and technical resource providers (MEC/TRPs) that support them.
SMALL AND MEDIUM-SIZED MANUFACTURING ENTERPRISES
The estimated 330,000 SMEs in the United States have a substantial economic impact. Defined as having fewer than 500 employees, SMEs are important to the nation because they account for 98 percent of all manufacturing plants, employ two-thirds of the nation's 18 million manufacturing workers, generate more than half of the total value-added in the manufacturing sector, and are the source of many innovations in technology.
SMEs typically provide capabilities that their larger customers do not have or cannot cost-effectively create, such as:
agility in responding to changes in technologies, markets, and trends
efficiency due, in part, to less bureaucracy
initiative and entrepreneurial behavior on the part of employees resulting in higher levels of creativity and energy and a greater desire for success
access to specialized proprietary technologies, process capabilities, and expertise
shorter time-to-market because operations are small and focused
lower labor costs and less restrictive labor contracts
spreading the costs of specialized capabilities over larger production volumes by serving multiple customers
lower cost, customer focused, and customized services, including documentation, after-sales support, spare parts, recycling, and disposal
The committee defined a supply chain as an association of customers and suppliers who, working together yet in their own best interests, buy,
convert, distribute, and sell goods and services among themselves resulting in the creation of a specific end product. A supply chain includes all of the capabilities and functions required to design, fabricate, distribute, sell, support, use, and recycle or dispose of a product. An integrated supply chain can be defined as an association of customers and suppliers who work together to optimize their collective performance in the creation, distribution, and support of an end product. The objective of integration is to focus and coordinate the relevant resources of each participant on the needs of the supply chain and to optimize the overall performance of the chain.
GENERAL REQUIREMENTS AND CAPABILITIES
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. A comparison of the requirements of each OEM's supply chain with the unique capabilities of an SME and its own supply chains often reveals deficiencies or gaps the SME must address. Closing these gaps involves (1) eliminating or circumventing constraints, (2) obtaining appropriate capabilities to satisfy the unmet need, and (3) utilizing the capabilities in a timely and effective manner. Although each SME has its own definition of success, the committee defined successful supply chain participation in a manner similar to the traditional definition of business success (i.e., participation in which benefits to the participant substantially exceed the costs).
REQUIREMENTS, CAPABILITIES, AND GAPS
Competitive cost, quality, service, and delivery are the traditional fundamental capabilities required of all suppliers, but successful participation in today's integrated supply chains requires more. Although these evolving fundamental capabilities are still the cornerstones of supply chain requirements, technology and management skills are increasingly critical for success.
Today's global markets demand products of higher quality, but high-quality products cannot be assembled cost effectively from low-quality components. Therefore, to remain competitive, OEMs are demanding higher quality products from their suppliers. Suppliers with quality deficiencies weaken the entire supply chain and, unless they improve, are
being phased out. Quality is even more critical in supply chains using just-in-time manufacturing and low inventory levels because there are fewer buffers to protect against quality failures.
Thus, SMEs should not consider quality as only a requirement for continued supply chain participation, but as a strategic capability. SMEs that adopt quality as a competitive strategy find that they are better able to weather cyclical swings in their business and that their product costs are lower.
Recommendation. In response to the requirements of integrated supply chains for improved quality, small and medium-sized manufacturing enterprises should adopt quality as a competitive strategy and consider implementing techniques, such as six sigma, ISO certification, and statistical process controls, to comply with customer demands, improve overall business performance, and provide a common language for communication on quality issues.
Cost and Value
Costs have always been critical, and in the increasingly global economy it is not unusual for SMEs to find sudden gaps between their prices and the prices of competitors from low-cost areas. The convergence of (1) improvements in high-speed communications, (2) reductions in transportation costs, (3) the widespread adoption of English as the language of business, and (4) universal access to technology and effective management practices has enabled companies in areas with low labor costs to become competitive regardless of their location. Thus, SMEs must substantially reduce costs by using both traditional and innovative approaches, such as integrating their own supply chains.
Many SMEs will have to do more than provide low-cost parts if they want to become partners with demanding customers. They will also have to provide value-added services, such as low-cost storage, rapid response to warranty issues, ready access to spare parts, improved logistics, and increased design capabilities. Because their present customers may be unwilling to pay for added value, SMEs may have to reposition themselves into new industries and find customers that are willing to pay for value-added products and services.
Recommendation. Small and medium-sized manufacturing enterprises should rigorously reduce costs internally and throughout their supply chains. They should also seek ways to increase the value-added to their products and services and find customers that are willing to reward such value.
With increased levels of supply chain integration and reduced inventory levels, reliable, on-time deliveries have become critical for success. Large inventories and production capacities were traditionally required to ensure on-time delivery. However, with advanced information systems, agile manufacturing organizations with flexible equipment and tooling, and sophisticated logistics systems, integrated supply chains no longer need large, costly inventory buffers to respond to unexpected events and variations in demand. These capabilities should be augmented by the effective use of advanced transportation capabilities, such as overnight delivery.
Recommendation. In response to increasing demands for rapid delivery and customized products, small and medium-sized manufacturing enterprises should consider using advanced supply chain communication systems, flexible manufacturing techniques, and modern transportation capabilities as alternatives to investing in large inventories and production capacities.
Customer expectations for timely service before, during, and after a sale continue to increase and, aided by the Internet and modern transportation methods, suppliers are responding to these demands. Web sites are being used to post maintenance manuals, service bulletins, and responses to frequently asked questions. e-Commerce enables customers to place orders around the clock from anywhere in the world without incurring the cost of long-distance calls. Replacement parts can be delivered overnight in the United States and within a few days in most of the rest of the world.
Recommendation. In response to increasing customer expectations for service and support, small and medium-sized manufacturing enterprises (SMEs) should reassess their service and support capabilities and revise them, as needed, to remain competitive and to seize new market opportunities. SMEs should develop an understanding of the opportunities provided by various Web technologies and, if appropriate, create a Web presence.
Partnerships are the backbone of integrated supply chains. In many
cases, partnerships provide opportunities for competitive advantage at lower cost than vertical integration.
Recommendation. Small and medium-sized manufacturing enterprises should develop a basic understanding of partnership agreements and, with legal assistance, use partnerships as a means for improving their responses to changing business conditions.
Management Skills and Human Factors
Managing an SME in an integrated supply chain is a complex task, and participation in multiple chains adds to the complexity. Rapid changes in the business environment, shorter product life cycles, and increasing customer demands require a robust management team that is willing and able to respond rapidly to changes.
Recommendation. Although extensive formal planning may not be justified, it is becoming imperative that small and medium-sized manufacturing enterprises periodically pause from the rush of daily business to survey the business environment of rapidly changing technologies and customer requirements and develop brief, formal business plans.
Recommendation. Small and medium-sized manufacturing enterprises should (1) assess and strengthen their management capabilities; (2) create a corporate environment conducive to the flexibility, change, evolving skills, and learning required by integrated supply chains; (3) integrate their own supply chains; (4) learn to deal effectively with risk; (5) develop the people skills required to integrate effectively with customer supply chains; and (6) engender a shift in corporate attitudes about supply chains from ''what's in it for me" to "how can we maximize the common good." Because all of the requisite skills are rarely resident in a single entrepreneur, SMEs should, whenever possible, increase the breadth and depth of their management teams.
Technology is playing an increasingly significant role in the success or failure of SMEs. Although up-to-date manufacturing and process technologies are critical, they are no longer the only required technologies. Information technology has become a key to operating success. Internet technologies alone are changing the mechanisms of communication, marketing, selling, buying, and generating revenue.
Recommendation. Small and medium-sized manufacturing enterprises (SMEs) should keep abreast of customer expectations regarding on-line responsiveness and use e-business service providers to assist them in creating and operating low-cost Web sites for displaying products, accepting orders, and answering frequently asked questions. SMEs without an on-line presence may find themselves at a strong competitive disadvantage.
Recommendation. Although the highest levels of communication capabilities can provide incredible competitive power, they are too complex and costly for most small and medium-sized manufacturing enterprises (SMEs). These technologies should be monitored closely, however, because their costs and ease of implementation are improving dramatically. Internet technologies can provide many of these capabilities today at far lower cost, and SMEs should take advantage of these easy-to-use technologies.
Recommendation. Despite significant media coverage of the capabilities of business management systems, small and medium-sized manufacturing enterprises should evaluate, but generally defer, purchasing enterprise resource planning and supply chain integration software until prices come down, these systems are easier to install and use, and the benefits of specific systems have been more thoroughly validated.
Recommendation. Regardless of the level of integration, senior management in small and medium-sized manufacturing enterprises should take the lead in using Internet technologies within their companies. They should closely monitor changes in information technology and invest now in basic capabilities, plan for future investments to support their competitive position, and study how and when to integrate their systems with those of other supply chain participants. Senior management should define data requirements and closely manage the implementation of appropriate data management and electronic communication capabilities.
Recommendation. Despite the increasing importance and glamour of Internet-based technologies, small and medium-sized manufacturing enterprises should not ignore up-to-date manufacturing and process technologies. They remain essential for success.
Recommendation. As supply chain integration requirements and the need for new technologies increase the financial requirements imposed on small and medium-sized manufacturing enterprises, they should
integrate their own supply chains to reduce redundant inventories and excess manufacturing capacities, thereby freeing cash for other investments.
CHARACTERISTICS OF SUCCESSFUL SMALL AND MEDIUM-SIZED MANUFACTURING ENTERPRISES
Based on interviews conducted for this study and the experience of committee members, successful SMEs tend to:
choose customers carefully
react appropriately to salient events that can define success or failure
establish strategic alliances and partnerships with customers and suppliers
cater to customers' needs
focus on quality
treat employees as valuable assets
select and monitor appropriate metrics
document business and manufacturing processes
use the Internet for business communications and education
share information with supply chain partners
ASSISTANCE FOR SMALL AND MEDIUM-SIZED MANUFACTURING ENTERPRISES
Not-for-profit MEC/TRPs (manufacturing extension centers and technical resource providers), chartered specifically to provide advice and counsel to SMEs, can be found in virtually every city and region in the United States. Although these organizations are extremely helpful to SMEs, the committee found that not all of them are fully capable of helping SMEs compete successfully in a rapidly changing integrated supply chain environment, nor are they consistently proficient in providing guidance to SMEs attempting to integrate their own supply chains. Specifically, MEC/TRPs must develop a standard set of supply chain best practices for SMEs and implement uniform integrated supply chain support programs at all of their centers. These programs must be of uniformly high quality because supply chain integration typically involves multiple companies in scattered locations, and inconsistencies among local programs and levels of support can make integration efforts difficult. MEC/TRPs will require sufficient public and private funding so that they can focus their efforts, not on fund raising, but on this important new mission without detracting from other critical SME support operations.
The specific recommendations in the body of this report are the true conclusions of this study. Nevertheless, some salient conclusions can be drawn from the report as a whole. In the context of converging trends in supply chain integration, technology, and logistics, which are resulting in dramatic increases in low-cost global competition and substantial demands for investment, small and medium-sized manufacturing enterprises must take the following key steps:
engage in meaningful strategic planning, not just budgeting
increase their financial, managerial, and technological strengths
add value to their products and integrate more closely with their customers
integrate their own supply chains to reduce costs and improve performance
These responses will not, by themselves, ensure competitiveness, but they are essential for the successful participation of small and medium-sized manufacturing enterprises in modern integrated supply chains.