Forging New Partnerships: How To Thrive in Today’s Global Value Chain

TheSmall and Medium Manufacturers Series
Forging New Partnerships:
How To Thrive in Today's Global Value ChainTheSmall and Medium Manufacturers Series
Forging New Partnerships:
How To Thrive in Today's Global Value Chain2007 by The Manufacturing Institute, the National Association of Manufacturers and RSM McGladrey, Inc.
All rights reserved.Table of Contents
Foreword............................................................ 5
Acknowledgements.................................................... 7
Introduction.......................................................... 9
Executive Summary.................................................. 10
Four Links in the New Value Chain...................................... 12
Your Expanded Role in the Value Chain.................................. 13
Challenges and Opportunities in the Changing Supply Chain ................ 15
The Challenge: Global Competition.................................. 16
The Opportunity: Grow Overseas Sales................................ 19
The Challenge: Pressures To Improve................................ 25
The Opportunity: Operations Excellence, Innovation Edge.............. 30
The Challenge: A Skilled Workforce.................................. 39
The Opportunity: Build a High-Skilled Workforce...................... 42
The Challenge: Identifying the Right Financing........................ 49
The Opportunity: Finance the Future................................ 51
Conclusion: A Matrix That Matters...................................... 55
Partners To Enhance Your Success in the Value Chain...................... 57
Endnotes.......................................................... 63Forging New Partnerships: How To Thrive in Today's Global Value Chain
Foreword
very manufacturer is part of a supply ment challenges facing SMMs as they position
E chain and, indeed, no company ever goes their businesses in larger, more expansive
it alone. Significant change is now under- value chains and offers practical insights
way and the parameters of traditional supply and best practices for SMMs to optimize
chains are morphing under the pressure of their opportunities.
a globalizing economy. Manufacturers adher- Owners and managers of small and
ing to old supply-chain rules are putting medium companies are often so focused on
their businesses in jeopardy by not adapting day-to-day operations they forget to look up
to new rules. long enough to see how overall linkages in
With the arrival of an interconnected globalmanufacturing are changing�and how their
marketplace on Internet time, value chains companies might profit from this shift. In fact,
are rapidly replacing supply chains. Value they may believe that their firm�s growth
chains require business owners to think well potential is limited. My experience with SMMs
beyond traditional supply-chain arrange- indicates these limits are self-imposed and
ments. They require greater levels of collab- have little to do with the opportunities that
oration with external partners, including abound for firms. SMMs�like all manufac-
suppliers and customers. Value-chain manu - turers�must look beyond the border of self-
facturing also requires employees who have constrained boxes and beyond the borders
skills far superior to their predecessors and of traditional U.S. markets. But to do that
world outlooks framed by these new realities. requires they build an organization with the
Companies harnessing this new value capability to succeed anywhere. This is the
chain are thriving and laying productive value-chain success strategy.
foundations for their futures. This report� Our research at RSM McGladrey, Inc.,
Forging New Partnerships: How To Thrive in indicates only half of all manufacturers have
Todays Global Value Chain�seeks to raise these value-chain strategies. While larger
the understanding of the threat to small companies are more likely to pursue global
and medium manufacturers (SMMs) who courses, the benefits also are available to
stick to the past while shedding light on how SMMs�lower costs, more customers and,
best to take advantage of the new reality of most importantly, a growing market presence
value chains. around the world.
Last year, working with the National Asso - Our experience with SMM clients and
ciation of Manufacturers (NAM) and The NAM members has given us a unique under-
Manufacturing Institute, we published The standing of how difficult it can be to operate
Future Success of Small and Medium Manu - in the new value chain, especially as these
i
facturers: Challenges and Policy Issues.This firms expand around the globe. Companies
widely read report not only documented must navigate cultural barriers, language
internal management, external policy and difficulties, financing challenges and
market challenges facing SMMs, it also out- unknown regulatory, tax and compliance
lined policy recommendations to spur manu- issues. Savings from process improvements,
facturing competitiveness. such as lean, become more important than
Forging New Partnershipsis a strategic look ever before. Large companies are handing
at the external market and internal manage - off much of their innovation to SMMs who
5Forging New Partnerships: How To Thrive in Today's Global Value Chain
in the past merely built to specifications. It U.S. manufacturing will retain its global
might seem like a safe approach to focus leadership only if its manufacturers of all
solely on the sourcing side through strategies sizes seize the opportunities the expanded
such as outsourcing or procuring imported value chain presents. We are proud to work
components, but safe is not sound. It is with the NAM, The Manufacturing Institute
imperative that SMMs also look at the sell and its members in putting forth best prac-
side, and the tremendous opportunity for tices and strategies to make that happen.
growth this might offer.
Going global is not without risk, but
competing in the United States against
increasingly global competition is no picnic
either. Yet, there are countless resources to
help SMMs. We hope through the stories,
practices and examples in this report, SMMs
will begin to see how the rewards of superior
value-chain management can far outweigh
the risks.
Thomas G. Murphy
Executive Vice President
Manufacturing & Wholesale Distribution
RSM McGladrey, Inc.
Audit and attest services are provided through McGladrey & Pullen LLP, a partner-owned CPA firm. RSM McGladrey, Inc. and
McGladrey & Pullen have an alternative practice structure. Though separate and independent legal entities, RSM McGladrey and
McGladrey & Pullen are members of RSM International, an affiliation of separate and independent legal entities.
6Forging New Partnerships: How To Thrive in Today's Global Value Chain
Acknowledgements
he Manufacturing Institute and the those who gave us their good ideas and sug-
T National Association of Manufacturers gestions from beginning to end, especially
(NAM) want to thank and recognize the many SMM Director Jeff Noah, who partnered
individuals who helped develop and issue with us on this from the outset; Senior
this report. We are grateful to Institute Chair-Director of Member Communications and
man Joe Loughrey and NAM President and Marketing Services Irina Stepanova and
CEO John Engler for encouraging us to pro- Editor Julia Sydnor.
ceed with this publication and seeing the We thank the following 21 SMM leaders
value in a new publication that will help smallwho provided their insights specifically for
and medium manufacturers (SMMs) compete this report and whose experiences make
more effectively in the global marketplace. this such a valuable look at how to succeed
We thank Tom Murphy, executive vice in todays manufacturing economy:
president at RSM McGladrey, a global Erick Ajax,vice president, E.J. Ajax and
accounting, tax and business consulting firm Sons, Inc., Fridley, Minn.
headquartered in Bloomington, Minn., for Mary Andringa,president and CEO,
sponsoring and supporting this publication Vermeer Manufacturing Co., Pella, Iowa
and for his active involvement in its writing. Ronald Boles,president, General & Auto -
RSM McGladrey serves SMMs and the com- motive Machine Shop, Inc., Huntsville, Ala.
pany brought its extensive knowledge to bear Ronald Bullock,chairman and CEO, Bison
in shaping this report. Gear & Engineering, St. Charles, Ill.
We were assisted in researching and Jeffrey Evans,president, CEO and chair-
drafting parts of this publication by the MPI man, The Will-Burt Co., Orrville, Ohio
Group Inc., a research firm in Shaker Heights, Drew Greenblatt,president and owner,
Ohio, and its CEO John Brandt and Vice Marlin Steel Wire Products, Baltimore, Md.
President George Taninecz. Their knowledge Stephanie Harkness,chairman and
of modern manufacturing, backgrounds as CEO, Pacific Plastics & Engineering,
editors at IndustryWeek,publishing-manage- Soquel, Calif.
ment expertise, and knowledge gained Hannes Hunschofsky,president,
through interviews of executives at leading Hoerbiger Corporation of America,
SMMs were invaluable in making this report Pompano Beach, Fla.
both current and practical. Collie Hutter,COO and owner, Click
At The Manufacturing Institute, Bill Canis, Bond, Inc., Carson City, Nev.
acting president, managed the writing and Kellie Johnson,president, ACE Clearwater
production of this report. We would like to Enterprises, Torrance, Calif.
thank Senior Vice President Phyllis Eisen Kendig Kneen,CEO and owner, Al-jon,
and Managing Director of the Center for Inc., Ottumwa, Iowa
Workforce Success Stacey Wagner for their James Knott,president and founder,
advice and counsel. Communications Vice Riverdale Mills Corp., Northbridge, Mass.
President Laura Narvaiz contributed her good Stewart McMillan,president, Task Force
ideas and is helping publicize this report Tips, Valparaiso, Ind.
among SMMs, other business organizations Dyke Messinger,president and CEO,
and the media. At the NAM, many thanks to Power Curbers, Inc., Salisbury, N.C.
7Forging New Partnerships: How To Thrive in Today's Global Value Chain
Lowell Miles,CEO and chairman, vided valuable assistance and examples.
Miles Fiberglass & Composites Inc., The National Institute of Standards and
Portland, Ore. Technology (NIST) MEP also collaborated
Dave Morgan,president and COO, Allmand with us on a roundtable with a cross-section
Bros. Inc., Holdrege, Neb. of SMMs; thanks to MEPs director, Roger
Tony Raimondo,team leader, Behlen Kilmer, for his leadership and participation
Mfg. Co., Columbus, Neb. and to Mike Stone for his facilitation expertise.
Kristy Schloss,president/CEO, Schloss Thanks also to Jack Stewart, president of
Engineered Equipment, Inc., Aurora, Colo. the California Manufacturers & Technology
Chuck VerMerris,CEO and president, Association and Judith DAmico, western
Radix Wire Co., Cleveland, Ohio regional director for Project Lead the Way,
Paul Wagner,CEO and chairman, Minne - for their insights and suggestions at that
sota Wire & Cable Co., St. Paul, Minn. forum. The roundtable served as a valuable
Richard Wilkey,president, Fisher Barton, focus group to confirm and enhance some
Inc., Watertown, Wis. of the concepts in this publication.
We also thank the Manufacturing Exten -
sion Partnership (MEP) and partners for
their insights throughout this report. Mark
Troppe, Mark Schmit and Mike Stone pro-
8Forging New Partnerships: How To Thrive in Today's Global Value Chain
Introduction
ith the rise of globalization, the world production value, their failures and successes
W has witnessed a dramatic increase in can have consequences far beyond individual
the role that small and medium manufacturers manufacturing facilities. Consider how dif-
(SMMs) play in traditional supply chains. ficulties at a small vendor in the third tier
In 2006, The Manufacturing Institute�s first of the automotive value chain might affect
report in this series�The Future Success of other manufacturers, disrupting production
Small and Medium Manufacturers�identified at parts or auto plants. Conversely, that
15 best practices used by SMMs and recom- same supplier might develop an innovative,
mended federal policies to strengthen the new product or process that saves time and
sector. This report, Forging New Partnerships, money for its customers and, consequently,
complements that earlier publication by those same large end-use customers.
examining internal management issues that SMMs encounter many obstacles and risks
SMMs are grappling with, as well as their as they expand throughout global value chains.
abilities to take advantage of economic Forging New Partnershipsreviews these chal-
changes at home and abroad. lenges, but also illustrates how SMMs have
SMMs have always been critical players turned these obstacles into opportunities by�
in supply chains, but their prominence has �taking on global competitors, at home
grown with manufacturings new, global value and abroad;
chainsthat encompass products, processes �embracing continuous improvement,
and value-added services. SMMs are engaged such as lean manufacturing and other
at every stage�from research and develop- methodologies;
ment through manufacturing, packaging, �improving workforce skills;
shipment, service and support. These new �building an innovation culture inside
value chains�networks of interdependent their companies; and
corporate relationships and the workforces �developing and funding next-generation
that make them go�serve manufacturers� processes, products and markets.
efforts by reducing costs, encouraging Many challenges face todays manufactur-
inno vation and helping to drive company ers, yet so do many opportunities. We hope
expansions. that the insights in Forging New Partnerships
The adage that no chain is stronger than will let manufacturers realize those oppor-
its weakest link is especially true of value- tunities and help build a stronger manufac-
chain relationships among manufacturers. turing economy for companies of all sizes.
Since SMMs account for 40 percent of U.S.
John Engler Bill Canis
President and CEO Acting President
National Association of Manufacturers The Manufacturing Institute
9Forging New Partnerships: How To Thrive in Today's Global Value Chain
Executive Summary
orging New Partnershipsis a strategic look trillion in 2006, nearly doubling over the
ii
F at the external market and internal man - last decade from $612.1 billion in 1996.
agement challenges facing small and medium Working successfully within the supply
manufacturers (SMMs)* as they position chain is key to capitalizing on these new
their businesses in larger, more expansive opportunities. Yet, the way manufacturers
value chains. It is based on exten sive inter- relate to each other in the supply chain has
views with a cross-section of SMM executives, changed. The old supply chain connected
survey data and a special roundtable dis- mostly domestic suppliers to pro ducers who
cussion with SMM executives. The report� assembled and/or transformed those com-
�examines how the new value chains dif- ponents into a final product and sold it to
fer today from the supply chains of the the end consumer. It was a vertically organ-
past and the critical role of SMMs in it; ized structure with mainly components
�shows how SMMs can leverage new op - flowing through the supply chain while
portunities to grow profits, expand into product design, pricing and service were
new markets and delight customers; and dictated and managed by the final producer.
�offers SMMs a valuable resource section Primary responsibility for innovation and
that will help you network and find value creation resided with the Original
the strategic partnerships discussed Equipment Manufacturer (OEMs).
in the report. Today, manufacturers are part of a new
The many best practices cited in this value chain that is a more complex matrix
report are drawn from interviews with NAM of interdependent corporate relationships
members, results of an annual survey by and the workforce that makes them succeed.
RSM McGladrey and insights from the NIST Innovation and value are created at all levels
Manufacturing Extension Partnership (MEP). of the chain and in collaboration with exter -
The NAM and the Institute also convened a nal partners. In the new value chain, SMMs
roundtable discussion with a dozen SMM are more than just build-to-print suppliers.
leaders where we discussed their business They are integral partners that help create
models and the major themes in this booklet. the new technologies, products, services and
What we learned at that dialogue is reflected business models that are vital for success,
in these pages as well. here and abroad.
This report comes at an appropriate time: Forging New Partnershipsoffers practical
U.S. manufacturers today have ever-better insights and strategies for SMMs to optimize
opportunities for growth domestically and their opportunities in todays value chain,
internationally. More is being produced in including these:
the United States now than at any time in �Cultivate an innovation cultureat your
the past, while exchange rates make U.S. company by offering unique incentives
products increasingly in demand abroad. and rewards to employees who bring
U.S. goods exports were more than $1.023 forth innovative ideas. As part of this
* Small manufacturers (500 or fewer employees) and medium manufacturers (500 to 2,000 employees, unless
otherwise noted in this report) make up the vast majority of all manufacturers (99 percent) and account for
40 percent of U.S. production value. There are about 295,000 SMMs in the United States.
10Forging New Partnerships: How To Thrive in Today's Global Value Chain
culture, implement lean manufacturing �A matrix that matters.In the report�s
to help better compete while keeping conclusion, our authors have combined
employment flat and reducing costs. the best practices cited in the report into
�Succeed with overseas salesby supplying a matrix that shows where your company
your customers when they set up overseas may fit in the new value chain, ranging
operations and winning new markets by from weak links to partner links. It
offering a better product than local over- assesses your effectiveness with both
seas businesses. To jumpstart exporting, suppliers and customers and is good to
use the resources of the Manufacturing look at not just today but six months or
Extension Partnership (MEP) and the a year from now to gauge your success.
U.S. Foreign & Commercial Service. Use it as your own internal report card.
�Tap your local community collegeboth �Resources for SMMs.In the final section
for new talented workers and as a poten- of the report, we have pulled together
tial research partner for new products. suggestions for you to consider in part-
One SMM calls her strategic partnership nering for success. Do you think you have
utilizing her local college�s technology something that the U.S. Department of
assets compute to compete. Defense could use? We tell you how to
�Use often overlooked financing options find it through PRO-Net. Do you wonder
to grow your business, such as govern- who to first contact about getting started
ment programs and tax benefits. with sales abroad? Four export-specific
This report gives SMMs these tools and Web sites are identified that will help you
many more, showing the ways you can suc- get going. There are similar resources
ceed and thrive if you take the right steps. for getting the new skilled workers you
need and suggestions of where to turn if
To make this report as relevant as possi-
ble for todays busy SMM executive, we have you want to hone your innovation edge but
have some technology-related hurdles.
included several features that will help you While many of these are Web links, almost
focus on tangible results:
all of the sites have contact information
�SMM interviews.Our interviews with so you can speak to a representative to
SMM executives are used throughout the answer your own specific questions.
report to show that the goals of greater
innovation, new markets, a skilled work -
force and new financing are very doable
and within the reach of all SMMs. For
example, too many SMMs have shied away
from finding overseas markets for their
products. The interview with Schloss
Engineered Equipment demonstrates how
one SMM harnessed the services of the
federal government to find those over-
seas markets. And the sidebar interview
with the CEO of Power Curbers gives a
five-step process for identifying an
overseas market niche and then finding
the right partner there to help you succeed.
11Forging New Partnerships: How To Thrive in Today's Global Value Chain
Four Links in the New Value Chain
here is no magical potion that will operator (incapable of improvement) or
T transform your business into a value- a commodity player (always under price
chain success overnight. After all, manufac - pressures). This is especially true during
turing is not monolithic. What works for one a period when many markets (e.g., the
SMM may not work for another. defense industry and green products)
But to succeed in todays value chain, one have insatiable appetites for something
thing is clear: Managers need to line up new new. It�s a fact of manufacturing life that
partners. Focusing only on how well the businesses big and small have embraced
machines work inside the plant is not enough new ways of operating�for example, lean
to compete successfully now and in the future. manufacturing on the plant floor�and
It requires difficult but rewarding work tools and cultures of innovation for
involving not just your firm, but countless products and services.
others. By connecting with outside resources� �Workforce�Amid a tight labor market,
partners within your industry and overseas, especially for manufacturers, SMMs must
suppliers, customers, your customers cus- find ways to hire, develop, reward and
tomers, government, academia�SMMs can retain the workforces necessary to com-
swiftly expand their core competencies and pete in the new value-chain paradigm.
gain economies of scale. Making the effort to SMMs can and do look for outside assis-
collaborate will enable your small or mid- tance and government support, but ulti-
size company to meet todays challenges and mately, it�s up to each company to make
leverage new opportunities associated with: sure they have the best workforce possible.
�Global competition�Foreign competition SMMs who pay attention to recruiting,
is everywhere, and the decision for SMMs hiring and workforce development will
is not, Willyou compete on a global basis? have a deep talent pool, from entry level to
but, Howwill you compete? SMMs executive, that brings them a competi-
must define and fortify their positions tive advantage, helps them fend off chal-
in a global supply chain by reviewing lenges and leverage new opportunities.
options (e.g.,buying foreign materials, �Financing�Innovation, overseas sales
selling overseas) and the rewards, chal- and a stronger workforce all require new
lenges and risks associated with each. investment strategies. Wise investments
Growing overseas sales and even invest- made with rigorous analysis will help SMMs
ing abroad are surefire ways to help ensure that operations and financial
compete effectively. The only wrong strategies are synchronized for controlled
decision is to ignore globalization. growth and ready for the demands that
�New strategies, new ideas�Improvement todays value chains impose. A core best
and innovation go hand in hand. A com- practice is taking advantage of tax laws
mitment to innovation and new ways of that encourage these investments and
doing business�in products, processes, government programs that can provide
technologies and strategies�frees assets you with the cash and resources to expand,
and opens up selling opportunities for build a strong, skilled workforce or export.
SMMs. A focus on innovation will keep There are also a range of private funding
your company from becoming a stagnant opportunities that work for some SMMs.
12Forging New Partnerships: How To Thrive in Today's Global Value Chain
Your Expanded Role in the Value Chain
eyond understanding the four main links, SMMs must also take a broader look
B at how their overall functions in the value chain are evolving. In this new
world, business-to-business customers want to see SMMs expanding their roles and
adding more value as a supplier (product development, inventory management,
product support, etc.). SMMs need to seize this opportunity and create partnering pos-
sibilities, structuring longer-term agreements that provide stability and rewards
commensurate with the new roles and risks they are assuming.
In todays value chains, business operations One of the things that small companies
and responsibilities are moving upstream, tend to do poorly that is really important is
as SMMs are asked to participate in product a concept called the fuzzy front end, says
functions from cradle to grave, i.e.,product Dick Strojinc, director in the manufac turing
design to warranty and recycling. Similarly, and distribution consulting practice for
many SMMs in large equipment markets find RSM McGladrey, Inc., a leading national
themselves not only supplying production business, consulting and tax firm focused
equipment to other manufacturers, but also on SMMs And that is the beginning stage
designing entire production lines, including of doing product development, getting a
the development of specifications as well as clear definition of what the end customer
integration and maintenance responsibilities. wants. Strojinc says getting that initial
It�s now common for suppliers to assume phase correct helps to ensure that product
complete design responsibility for their development has a high success rate. Big
materials or components as incorporated corporations are very good at doing that. It
into the end product (as opposed to simply is a process that medium and small compa-
manufacturing to customer specifications). nies could do just as easily.�
Other SMMs are being asked to design a Many SMMs are trying to get closer to
broader portion of the end product itself. customers for product development and
Both scenarios present challenges that SMMs other issues, with more than half of SMM
are often ill-equipped to handle. For example, plants (59 percent) reporting some inte-
more than 60 percent of small manufacturers gration with their customers and 11 percent
and 40 percent of medium manufacturers reporting extensive integration, compared
lack a defined new product development to 61 percent and 10 percent of large-com-
and introduction (NPDI) process. In most pany plants. But SMMs also need to get their
companies, ownership of innovation is dis- own suppliers involved: Just 56 percent
tributed throughout the organization, but in report some integration with suppliers and
SMMs this function is typically managed by 8 percent report extensive integration,
a single senior executive or business owner. compared to 72 percent and 9 percent of
iv
SMMs also often fail to manage and distrib- large-company plants.
ute information about product design and Integration and closeness with suppliers
development with team members both inside and customers is more important now than
and outside the firm, preventing timely data ever because with expanded supply-chain
iii
from reaching key decision-makers. roles come heightened risks, and customers
13Forging New Partnerships: How To Thrive in Today's Global Value Chain
are pushing more of those risks on to SMMs. foreign producers by emphasizing product
End-product quality and warranty issues and service quality as well as the verified
are increasingly a supplier�sresponsibility, integrity of their supply base. As regulators
which means that SMMs need to ensure the take harder looks at imports, particularly
materials, ingredients and components they from China, SMMs need to strike now�and
deliver to customers, as well as what they offer competitively priced products with
receive from their own suppliers, meet spe - the service and support levels (value added)
cifications. Stories of flawed goods sourced that customers cant get from manufacturers
from China�tainted wheat gluten, children�s in low-cost regions.
toys contaminated with lead-based paints However, becoming the value-added,
and truck tires prone to disintegration� inno vative supplier that is so in demand in
should put SMMs and all manufacturers on todays value chain forces SMMs to overcome
notice: How well do you know your supply several obstacles. The following sections
base�and the quality of sourced goods? take a look at these challenges and, more
SMMs have a unique opportunity to importantly, examine how to turn them
position themselves as an alternative to into opportunities.
ACE Clearwater Enterprises: Getting the Front End Right
The roles of both SMMs and their larger company customers are changing
as more responsibilities shift to SMMs. Just bringing lean operations to
your plant floor is not enough in the new value chain. You also have to get
the front end of manufacturing right: product design, engineering, quality
review, entering orders and making sure the appropriate tools are in place
before jobs are released to the shop floor.
Mastering this front end of manufacturing is a top priority for Kellie Johnson,
president of ACE Clearwater Enterprises in Torrance, Calif. She says, "If you
don't really focus on the front end and make that efficient, so it's error-
proof, then the shop floor is not going to have a chance. Oftentimes, an
engineer may miss something and if a tool needed for production is over-
looked and this omission is not caught going through the process-check,
then everything will come to a stop on the shop floor. One piece flow with
lean won't work if you are not addressing these front-end processes."
Johnson says that in the aerospace industry, where she is a supplier, "customers
are continuously flowing down quality requirements and order processing is
changing constantly, so small and medium manufacturers have to be ready
to respond. Our large customers may have this process standardized, but for
us, we are touching the front-end process every time an order comes in."
To get the important front-end right, Johnson says, "ACE created a 'people
cell'–that is it co-located contracts, manufacturing engineering, quality
engineering, program management & MRP planning–to perform our contract
review process. This ensures customer requirements are reviewed accurately
and in a timely way."
14Forging New Partnerships: How To Thrive in Today's Global Value Chain
Challenges and Opportunities in the
Changing Supply Chain
anufacturing supply chains have �Changing workplace dynamics that
M changed dramatically over the last demand a different kind of manufacturing
decade, and even the smallest of manufactur- workforce and high-skilled employees;
ers have components and materials whisking �Identification of new ways to finance
around the globe. As a result, manufacturers your operations here and abroad; and
have radically restructured their organiza- �A rapid transfer of responsibilities and
tions, outsourcing business functions in risks back through the value chain, requir-
search of cost savings, value-added services ing new capabilities for many SMMs.
and new ideas. This has led to an explosion in SMMs are working with others in their
the number of participants in todays value value chains to tap into opportunities that
chains�and in the complexity of managing cannot be addressed alone. This is a change
value-chain relationships. The bottom line from the past when such external partner-
is that there simply are more business cus- ships were less important. Today, they offer
tomers and suppliers around the globe, opportunities and keys to success.
creating a thriving worldwide economy. The following pages identify the chal-
World real GDP growth was more than 5 lenges and offer inquiring SMMs some
percent in 2006v, nearly twice the pace of pathways that have worked well for other
U.S. growth. manufacturers. The best practices cited here
Transforming supply chains into value and the resources at the end of the report
chains and nurturing the relationships they provide valuable insights for any manager
entail, especially on a global basis, present who wants to take his or her company to a
a multitude of new challenges to SMMs: higher level of performance.
�The prospect of doing (or doing more)
business overseas, both buying and sell-
ing abroad, i.e., �globalization;
�Acceleration of continuous improvement
and innovation activities as value chain
partners look for increased productivity
and the next great thing, whatever it may be;
15Forging New Partnerships: How To Thrive in Today's Global Value Chain
The Challenge: Global Competition
ew, if any, SMMs still compete solely in a regional or domestic market. Foreign
F competition is everywhere, and the decision for SMMs is not, �Willwe compete
on a global basis? but, Howwill we compete?� SMMs must define and fortify their
positions in a global supply chain by reviewing options (buying foreign materials,
selling overseas, etc.) and the rewards, challenges and risks associated with each.
The only wrong decision is a failure to decide.
The most prominent change in manufac tur- Yet there are still more than a few SMMs
ing over the last decade is the increasingly who dont sell or source overseas at all:
global nature of business and supply-chain Twenty-nine percent of plants owned by
relationships. In the United States, exports SMMs report no sales outside the United
and imports have risen 26.7 percent and 26 States, and, more surprisingly, 31 percent
vi
percent, respectively, since 2004. With report that they purchase no materials or
unprecedented movement of goods around components from beyond the United States.
the world, even so-called domestic markets Fully 64 percent of SMMs export less than
will not remain immune to foreign compe- 10 percent of their plant sales volume, and
tition for long. This puts SMMs firmly in 61 percent import less than 10 percent of their
the middle of import-export traffic�and in materials and components by dollar volume.
the crosshairs of global competitors. (Among large-company plants, 15 percent do
Most SMM leaders understand this: not export and 14 percent do not import.)viii
Forty-five percent of executives report that Of course, there may be a few SMMs with
globalization is the driver most likely to valid reasons for not going global�perhaps
influence their companys purchasing and because they operate within domestic supply
supplier-management strategy over the next chains. If this description doesnt fit your
decade, followed by cost leadership (39 business, though, then you need to explore
percent) and outsourcing (25 percent).vii the prospects of globalization: Study your
Interestingly enough, both cost leadership own global buy-and-sell options, assess
and outsourcing are, in part, concerns risks and rewards associated with each and
resulting from globalization, as manufactur - develop strategies to do business on the
ers ratchet down their cost structures to global stage as well as defend your U.S. turf
compete with low-cost regions of the world. from foreign imports.
It�s easy for many SMMs to put off a
"People are afraid of the decision to go global. There are so many
questions SMMs ask:
shipping, the payment, the
�How do I get started?
collection, all the issues that
�What are the best markets?
go with foreign sales. And once �Is getting paid by an overseas customer
any different than getting paid by a
you master those, it gives you
U.S. customer?
quite a competitive edge."
�Where do I find a trusted representative
Stewart McMillan, president, Task Force Tips to market my products for me?
16Forging New Partnerships: How To Thrive in Today's Global Value Chain
�Am I on my own or are there U.S. govern- lease on life. And I can say we havent looked
ment programs to help? back. I mean, are we going to lose orders now
�How will foreign currencies affect my and then? Yeah, we are. But we are going to
business? keep pedaling as fast as we can, and I think,
Stewart McMillan, president of Task in the end, we can win the game.�
Force Tips, an Indiana-based maker of Task Force Tips jumped into the interna-
firehose nozzles, had a decidedly negative tional market, forming an overseas distribu-
view of glo balization until he visited Taiwan tion network, a key facet of which is seriali-
a decade ago and found himself at a business zation of product sales. (Serialization
crossroads. Immediately upon his arrival, establishes selling markets aligned with
McMillan took a taxi to a competitors loca- resellers, thus ensuring that a reseller isnt
tion, where he stood and pondered the undersold or out-positioned by another
strengths and weaknesses of his company reseller in its own territory.) Through a
versus the competition: program that McMillan calls customeriza-
�And I thought, You know what? We can tion, Task Force Tips is able to deliver�with
win this game. And up until that point, I was the help of process and workforce improve-
a pretty dour son-of-a-gun around this place. ments and investments in technologynearly
I was telling people I was scared. They saw I any custom feature for a customer within
was scared. It made people here scared. I normal lead times (about 15 percent of the
came back from that trip with a whole new companys products are customerized).
Chart 1. SMM Global Activity
Source: IndustryWeek/Manufacturing Performance Institute 2006 Census of Manufacturers
17Forging New Partnerships: How To Thrive in Today's Global Value Chain
Today, Task Force Tips does about $30 million those, it gives you quite a competitive edge
in sales, of which a rapidly growing 35 per- over somebody else who�s chosen to ignore it.�
cent share comes from overseas customers. Like Task Force Tips, many SMMs with
McMillan offers a few clues to tackle the solid, well-thought-out overseas sales and/or
challenge of going global: sourcing strategies are able to grow their
�Well, guess what? It is difficult. But it�sbusinesses. But this is only possible if you
kind of like selling to the government. The open your minds and doors to participation
people that sell successfully to the govern- in the global trade revolution. The discus-
ment are the people that have figured out sion on pages 19-24 will show you how.
the paperwork. And once they get the paper -
work and the process figured out, the actual
manufacturing of the products is not as dif-
ficult as the paperwork. I think, to a large
degree, international business is very simi-
lar. People are afraid of the shipping, the
payment, the collection, all the issues that
go with foreign sales. And once you master
18Forging New Partnerships: How To Thrive in Today's Global Value Chain
The Opportunity: Grow Overseas Sales
any SMMs are successfully competing globally. These successful firms have
M an outward-oriented mindset that sees the potential market as international
in scope, not just domestic. They are proactive and have the confidence to commit
resources to international growth. This worldview has helped their companies grow
internationally and also become more competitive in the United States. Taking on
foreign competitors head-to-head has forced these SMMs to be better.
Few, if any, SMMs are immune to the threat export mechanics (such as shipping docu-
of foreign competition. As an SMM, you can mentation). Many stories in this booklet
ignore the threat as long as possible, perhaps were selected because they give you an idea
squeezing a few more years of profit out of of how other SMMs got started.
your markets before a global competitor makes These opportunities are certainly clearer
a major move. Or, you can see opportunity when current customers establish operations
for business growth by proactively planning overseas. If you want to retain their business,
your move into overseas sales. After all, 95 you may need to go where they go and many
percent of the worlds potential customers SMMs are doing just that. Sometimes that
live outside U.S. borders, with middle classes means you can export directly from your
growing rapidly in many of these big markets. U.S. plant, but it may mean that youll need
Developing an overall growth strategy to to open a small operation abroad to provide
increase sales abroad is the critical first step.the same level of service your OEM expects
This involves determining which products here. Either way, your loyalty to that customer
have export potential, identifying target will likely make your business relationship
countries and markets, understanding your even stronger than before.
strategic advantages and how you will com-
pete, and determining sales channels and Successful Export Strategies for SMMs
partners. (See the following section, which The Manufacturing Extension Partnership
includes a summary of a recent report on commissioned a study by Stone & Associates
successful SMM export strategies.) Your to identify successful export strategies for
plans will also need to include some thought CEOs of small manufacturers. The findings
about navigating in a growing market that (below), and specific examples that accom-
may have different rules from domestic pany them from NAM members, indicate
sales. There are issues including foreign that exporters who achieve successful inter -
currency transactions, customs paperwork, national growth tend to have the following
protecting your patents and trademarks and elements in their game plans:
getting paid in a timely way from a foreign
customer. You can find partners willing to �They have strategic advantages and know
help you get off the ground, including the how to exploit them. It is hard enough
Manufacturing Extension Partnership for to be successful competing on price with
overall growth strategy, and the U.S. Foreign a me-too offering in domestic markets.
and Commercial Service for foreign market It is even more difficult internationally,
intelligence, partner searches and detailed where you have the added cost of freight,
19Forging New Partnerships: How To Thrive in Today's Global Value Chain
logistics and international sales, and are improvement to his workforce that previously
sometimes competing against low-cost lacked the kind of discipline broughtout by
local players in places such as China. international standards.
Successful firms build their growth �They invest in new products and capa-
around some form of strategic advantage
that differentiates them from low-cost bilities�often specifically for the inter -
national market. Successful firms go
competitors and allows them to avoid beyond just selling their U.S. products
competing on price. These advantages
might be a product or technology that overseas. This can range from adapting
the product for local regulations and
performs better than competing solu- cultures to developing whole new product
tions, specialized process or technical lines aimed at international customers.
capability that few other firms have, a
quality advantage that results in longer Fisher Barton domestically supplies big
equipment-makers such as John Deere. As his
product life or lower costs for the cus- customers have grown their businesses abroad,
tomer, or a strategic focus on a niche
market that, if served effectively, is too he has sought their business, developing new
parts for new equipment designs and new
small to attract other competitors. markets. Looking beyond his hometown in
E.J. Ajax and Sons provides components to Wisconsin, president Richard Wilkey said the
appliance manufacturers. When the produc-
value added for a small exporter is to offer a
tion of a pressure cooker was moved to Asia, product that is better than what the OEM is
Ajax maintained the strategic partnership buying in the local European market.
and continued to supply parts. Sales into
the pressure cooker market of Asia have �They have learned that partnerships
increased sevenfold, providing this Minnesota with overseas distributors, represen-
SMM with a big growth story. tatives, agents and joint venture part-
ners are critical to success and should
�They have a proactive commitment and be selected systematically. Companies
mindset about pursuing international cannot sign up the first distributor that
opportunities as a key source of growth. comes along. This means asking for
At successful firms, the international references, conducting credit checks and
market is not treated as a lower priority financial due diligence and going to meet
than domestic sales. These firms are with potential partners in country. It also
committing resources to the international means strategically seeking out partners
business, dedicating staff to it, establishing that are already connected to target mar-
international revenue targets and plans kets that you want to penetrate. (In the
and are being patient about profitability. U.S. Commercial Service Basic Guide to
The CEO is prepared to travel extensively Exporting, youll find a nice checklist
to make it succeed. They also are proac- that can help you evaluate a potential
tive and aggressive about looking for new distributor or representative.)
foreign target markets and partners to One size does not fit all. Industries and
serve them. countries vary, so what works in Japan may
Tony Raimondo at Behlen Mfg. in Nebraska not work in France. Some SMMs identify a
committed to his companys first interna- representative who can engineer, estimate,
tional sales not only as a way to grow but sell and close because this one person will
also as a way to bring a system of continuous have to display all those aptitudes for you.
20Forging New Partnerships: How To Thrive in Today's Global Value Chain
Working with Business Representatives Abroad
One part of an international business strategy is to identify partners in foreign countries who can help bring
your product to market. The right representative for you may not be the same kind of person in every country,
as markets differ. A common strategy for many SMMs is to develop an international presence by working with
distributors, agents or other types of representatives. For example, Dyke Messinger, CEO of Power Curbers,
Inc., says his company has been doing business overseas for more than 30 years. Power Curbers has worked
hard to set up a distribution network overseas, completing the due diligence to identify potential markets
and then assessing distribution partners within those regions. Messinger has identified a five-step process
to get SMMs connected to international markets:
1. Identify the market–Messinger says his firm identifies potential markets by following the money.
As a manufacturer of machinery for slipforming concrete curbs-and-gutters and highway safety barriers,
Power Curbers follows government and private money flowing into infrastructure products. The com-
pany is currently gearing up for Eastern Europe, watching how and where road, rail and air infrastruc-
ture will locate, "and when that starts to happen, then machinery sales are going to follow," he says.
2. Gather market data–Once a market is spotted, the company gathers names of construction
equipment distributors there. Messinger says they use the Internet, trade associations, suggestions from
other manufacturers and occasionally the U.S. Department of Commerce (having done this before, he
is now experienced enough to forego the services provided by the DOC and do the legwork internally).
3. Narrow and communicate–Once a list of distributors is established, Power Curbers does a
rough cut of the names and Messinger says his company "starts some communication with them
to find out if they've ever considered a product like ours. And sometimes I find that they represent
our competition."
4. Visit the market and potential partners–With initial contact made, a Power Curbers represen-
tative goes to the country, continuing to gather information through any means possible, such as the
yellow pages, other manufacturers and distributors in the country, or even a good hotel business center.
The representative then makes visits to potential distribution partners and potential customers. "People
either respond with, 'I've never heard of that kind of machine before,' or, 'How does it work?' to, 'Oh, yeah,
I think so-and-so owns a machine like this.'"
5. Formalize a deal–"Depending on what you do next, there's, of course, a variety of options available,"
says Messinger. "The distributor may want to come and see one of our machines operate. They might
want to have another visit." Eventually, Power Curbers picks a distributor and inks an agreement. "And
the key at that point is what is your contractual arrangement with them–the contractual arrangement
can either make it easy for both of you to exit or it can make it very, very difficult. We think it's hard to
get out of contractual arrangements in this country. But, sometimes, it can be even worse overseas."
Because of Power Curbers' relatively small size and Messinger's reluctance to conclude long-term deals,
he typically tries to structure something on a one- or two-year basis so both parties can see how it
progresses and then move forward from there.
Although the process may seem extensive, Messinger insists that the total time (less travel) amounts to a days'
worth of work at the office. For Power Curbers and anyone else completing due diligence for a distributor or
for other international sales methods, it's a day well spent.
21Forging New Partnerships: How To Thrive in Today's Global Value Chain
�They have learned about the importance impetus to rejuvenate their organizations.
of investing in personal relationships, Tony Raimondo purchased Behlen Mfg.
and understanding and adapting to the Company in Columbus, Neb., in 1984 as part
local culture and way of doing business. of a management buyout. Raimondo, now
In international business, you must take chairman, realized he was buying into a
the time to invest in the development of struggling company. Behlen, which makes
personal relationships. Then business agricultural equipment, was a $32 million
will follow. company losing several million a year. Rai -
Finding someone who is already plugged into mondo set about overhauling weak processes
your industry and willing to work with you and business strategies and soon set up a
can put you many steps ahead. Building a one-man international sales department.
relationship with a consultant is a strategy The sales representative traveled the
that has worked well over time for Nevada- world pursuing opportunities for Behlen
based Click Bond, which successfully got products, and Raimondo joined him as
its parts on the Euro Fighter, Euro Copter opportunities developed. Global made us
and with Airbus. a stronger company as we had to address
�They leveraged relationships with existing weaknesses, says Raimondo. When our
multinational customers as initial sources people asked [in 1984] why we were going
of export business. For many companies, international, my answer was, We need to
be a stronger company. Thank goodness
these customers opened their eyes to the we did.�
potential for international business. That initial international effort has now
As mentioned above, both E.J. Ajax and pushed Behlen to $200 million in sales, of
Fisher Barton followed their major U.S. which up to 10 percent is exported to some
customers abroad, building their export
business in the process. 70 different countries. Behlen also now has
a joint venture in China for manufacturing
SMMs have independently found that the structural steel for the China market. Inc.
pursuit of overseas opportunities was an magazine named the company Turnaround
Schloss Engineered Equipment, Inc.
This Colorado-based manufacturer of environmental treatment equipment
decided 15 years ago that it was time to diversify its international markets.
Schloss previously had international sales, mainly through larger U.S. firms.
President and CEO Kristy Schloss says, "We started on this new approach
by capitalizing on the efforts of the U.S. Department of Commerce through
the Export Assistance Centers (USEAC). Their efforts, including catalog
shows, trade missions, matchmaking and Gold Key Service showed us the
way to become independent exporters and helped us when we ran into
obstacles." The biggest barrier she ran into in the initial years was getting
paid. "Now we make sure that the financing is in place so that we have
guarantees and letters of credit before we ship our product."
22Forging New Partnerships: How To Thrive in Today's Global Value Chain
Team of the Year in 1994, and Behlen won start being there in Asia, or we had to really
the state�s quality award in 2000 and 2005. pull out all of our efforts in Asia.�
Some SMMs have used many of the tech- Andringa says it has been a matter of
niques cited in this discussion and, along the survival in the region and, without the joint
way, have become as adept at international venture, Vermeer would lose a significant
business as bigger companies. Vermeer sales opportunity. We�re preserving jobs.
Manufacturing Company, a Pella, Iowa- If we didnt have this entity, we would lose
manufacturer of agricultural, construction, a whole market presence, which now, at
environmental and industrial heavy equip- least, allows us to still export some products
ment, has been exporting since the 1950s. into that area because we�re keeping the
Mary Andringa, CEO of Vermeer, says her market presence. And if we had just decided
father made the firm�s first trips to Europe, not to do that at all, I think we�d have [fewer]
demonstrating equipment and developing a jobs here.�
network of international distributors. Gaining international exposure for key
In the early 1970s, we set up an office; executives is an important element in building
sales, service and language abilities; and businesses over the long haul. In the 1990s,
product specialists closer to the customer Will-Burt worked with the Ohio Department
in Europe. We also have other offices that of Development in seeking foreign partners
are our wholly owned subsidiary offices in and in 2004 was honored as Exporter of
Australia and we are setting up one in Singa- the Year for Ohio, making it the smallest
pore. We are looking at South America to do company to receive the distinction. Jeffrey
a similar thing. We�re very intentional about Evans, CEO and president, says a key to
the fact that we would like to see our sales Will-Burt�s success has been making sure
to customers outside North America continue that the management team has significant
to grow in the years ahead� And that global international exposure.
presence is part of our five-year plan.� Knowledge of your foreign markets is in-
Vermeer has leveraged the interest of valuable when it comes to promoting or de -
inter national customers to grow domesti- fending your product. Evans says he must
cally as well. Vermeer now captures about fight to prevent knockoffs in China of Will-
20 percent of their sales outside of North Burt products. Will-Burt makes precision-
America, with about 15 percent of its sup- engineered solutions for commercial, mobile,
pliers located beyond North America. The industrial and military applications and now
company recently began a joint venture has two manufacturing and sales partners
assembly plant in China. The knee-jerk in China that produce and market products
reaction to a story like this might be to domestically and export internationally.
assume that American jobs are heading Until the past few years, Will-Burt main -
overseas, but the reality for Vermeer is tained a worldwide strategy, deploying the
quite the opposite. same product everywhere in the world, notes
�We had over 50 percent of the market for Evans. We are now attempting to create
one certain product in the 1990s in China,� product and service solutions specific to our
says Andringa, and it was all exported. And customers and markets, particularly in the
we soon had mini-replicas of that product differing geographies around the world,�
throughout China with many, multiple sup- he says. Will-Burt hired its first full-time
pliers of that product. So in order to be able employee in the Far East, who will coordinate
to keep our presence in Asia, we had to either all functions throughout the region.
23Forging New Partnerships: How To Thrive in Today's Global Value Chain
Succeeding with International Allies
Allmand Bros. Inc., a manufacturer of portable light towers, compact loader
backhoes, light stands, trailer-mounted arrowboards and message boards,
is based in Holdrege, Neb. Dave Morgan, president and COO, says the
company has sales of approximately $50 million, of which about 15 per-
cent come from overseas and could soon grow to 20 percent. His product is
being sold in Europe, Asia and the Middle East, with Mexico, Latin America
and South America also emerging as markets.
At the heart of the company's international growth has been its strong part-
nerships with overseas companies. "The no. 1 thing is finding business part-
ners in the part of the world that you want to get into that really, truly do act
and think like partners. And then the second thing would be that when you
have those partners, listen to them." He adds that assuming a U.S. product
will work elsewhere is a mistake. You need to listen to partners and, based
on their advice, be willing to modify product to meet local customs, regula-
tions and approaches.
For example, Morgan says that in the European Union (E.U.), his represen-
tatives and dealers serve as much more than those titles imply. "Both of
them have capabilities to probably manufacture a product if they wanted
to. But they like our product and they've partnered with us. In that part of
the world, that becomes particularly important because one of the strug-
gles that we have selling into particularly the E.U. is the regulations that
we face, the CE regulations." (The initials "CE" do not represent an
acronym but are a declaration by a manufacturer that product meets the
requirements of applicable European Directives.)
"We end up facing all kinds of technical specifications and engineering
hurdles that we've found particularly difficult to stay up on and to meet,"
says Morgan of E.U. requirements. So the E.U. partners stay close to market
requirements as they emerge and then manage final assembly of Allmand
Bros. product to comply with any recent changes. Morgan admits that the
process, instead of just shipping final product, can impede the flow of
goods and add cost, but it enables the company to hit "moving targets"
and compete in those markets.
For Will-Burt and other manufacturers, Ireland. Behlen Mfg. opened a facility in
building a plant overseas is often the cul- China to build for that booming construction
mination of their global business strategy. market and Pacific Plastics has factories in
Sometimes it is to avoid foreign tariffs or a India, Taiwan and Singapore, making medical
value-added tax that make direct sales from devices for a rapidly growing global health
the United States expensive. Kristy Schloss industry. These are successful growth
discovered this when selling to Europe, so strategies with strong U.S. manufacturing
her company opened a plant in Northern operations, but a global outlook.
24Forging New Partnerships: How To Thrive in Today's Global Value Chain
The Challenge: Pressures To Improve
nnovation has been described as the intersection of invention and commercializa-
I tion. It is about finding new ways of doing business that, internally, drive opera-
tional improvements and, externally, drive revenue growth and profits. It includes
new products and services, new processes and new business models and strategies.
Lean manufacturing is a form of innovation that frees up resources, time and energy
to devote to new ideas and products.
Many SMMs are not attuned to the need for failure, with firms that dont develop a
continuous improvement. They continue continuous-improve ment mindset being
to focus on doing business, firefighting left behind by competitors�both domestic
through their problems because they believe and international.
there�s not enough time to work on continu- Innovation is one of the things that Ame -
ous improvement. In fact, the business of rican manufacturers have consistently done
improvement really is the business. For some, better than their peers in other industrial
there may be a temporary luxury of captive countries. Where an innovation culture thrives
markets and attractive margins, meaning in a company, there is successful manufac-
they lack a burning platform to inspire turing�what was once called Yankee inge-
improve ment. Eventually this results in nuity. There�s no guarantee that U.S. manu-
Chart 2. Lean Disparity
0 10% 20% 30% 40% 50% 60% 70% 80%
Source: IndustryWeek/Manufacturing Performance Institute 2006 Census of Manufacturers
25Forging New Partnerships: How To Thrive in Today's Global Value Chain
facturers will retain this hold on innovation, phasized, but every industry has embraced
however. Rising education levels around the some form of them and companies of all
world and an emulation of the successes here sizes are demanding that their supply bases
will increasingly challenge manufacturers respond�or those companies will find
of all sizes. Internal challenges to fostering other suppliers. Lean manufacturing is one
innovation include: of the major improvement models that is
�A lack of senior management buy-in to generally considered the collective techniques
the innovation process; and concepts that enable companies to effi-
�Inaccurate metrics to measure it; ciently and perfectly satisfy customer demand;
�Poor understanding by employees of the key process principles of lean are eliminat-
repercussions of poor quality; ing waste in its many forms (e.g.,too much
�Absence of community college and other inventory, extra motion, excessive time) and
training partners who can help you build increasing value added, i.e.,that which the
up employee skills and technology customer really wants and values. In addition,
applica tion; and in these times of tight labor markets, lean
�Supply chain partners that dont help SMMs frequently frees up human capital and enables
build a stronger innovation pipeline. SMMs to redeploy employees into a more agile
Little time remains for SMMs sitting on workforce, one capable of doing more with
the improvement sidelines. Some may think less. Nonetheless, the numbers show that
that improvement approaches are overem- not enough SMMs are lean�or even trying.
Bison Gear and Engineering: Lean for Suppliers Is Not an Option
Getting suppliers to see the value of lean is a high priority for manufactur-
ers who want to see the full benefits throughout their value chain. At Bison
Gear and Engineering in St. Charles, Ill., adhering to lean is not an option
for suppliers–it's a mandate.
Bison, a manufacturer of a product line of fractional horsepower gear
motors, began its own lean initiative in 2000 by reconfiguring its plant to
accommodate flow processing cells and component replenishment areas.
Chairman and CEO Ron Bullock says, "Moving to lean was a competitive
imperative for us and was the pathway to improving customer service and
quality in everything we do."
Revamping Bison's facility was just the beginning. Close on the heels of
those internal changes, Ron Bullock announced the Supplier Partnership
Improvement Plan (SPIP) because "suppliers must be comprehensively
included as partners to ensure our own successful lean manufacturing."
SPIP promotes, monitors and rewards suppliers who cooperate by reduc-
ing lead times and inventory levels, improving response time, reducing
costs, improving product and information flow and implementing Kanban
replenishment practices. Bison assists those suppliers who need help in
mastering lean and quality practices.
26Forging New Partnerships: How To Thrive in Today's Global Value Chain
Almost 80 percent of U.S. manufacturing U.S. plants that have implemented at least one
plants with large corporate parents ($1 bil- of the lean approaches report a median 35
lion or more in annual revenue) are pursuing percent gross profit margin and $197,000
some form of lean manufacturing, whether sales per employee, versus just 31 percent
lean itself, lean and Six Sigma, or the Toyota gross profit and $150,000 for those not
Production System. Only 51 percent of SMM implementing lean.xi The lean gap faced
plants are using one of the lean approaches, by SMMs is especially surprising because
however, and a startling 22 percent of SMM lean is an approach that small companies can
plants follow no improvementmethodology afford, requiring them only to understand
ix
whatsoever (see Lean Disparity). the processes, identify wastes, address the
The efficient movement of right-sized root causes of problems, and then improve the
inventories through the value chain is criticalprocess with available resources (as opposed
to profitability�and a key tenet of lean manu- to approaches that immediately throw
facturing. To achieve this, U.S. plants use equipment or technology at the problem).
just-in-time supplier deliveries (in place at Often, the early steps of lean will rearrange
43 percent of U.S. plants), pull systems with processes and make use of simplermeans
kanban signals (40 percent) and vendor- for operations, occasionally removing
managed or -owned inventories whereby equipment and technology monuments.�
suppliers are responsible for in-plant Only after processes have been improved
material and components until a product is are investments in automation or equip-
produced (34 percent). Here, too, SMMs are ment considered.
falling behind in adoption rates for these Lowell Miles, CEO and chairman of
practices, with a full 21 percent using no Miles Fiberglass & Composites Inc., in
inventory-management techniques (see Portland, Ore., has seen his company through
x
Inventory Management). many transitions. After the companys
The reluctance of SMMs to adopt lean largest customer cancelled orders in 2001,
principles undermines their bottom lines: Miles was forced to diversify its customer
Table 1. Forms of Inventory Management
Large Companies Lead Smaller Companies
U.S. Parent company Parent company
plants less than $1 billion $1 billion or more
Just-in-time supplier deliveries 42.9% 42.2% 48.6%
Pull systems with kanban signal 40.1% 38.1% 51.4%
Vendor-managed or -owned inventories 33.6% 30.4% 50.0%
Quick equipment changeovers 29.0% 26.6% 46.4%
One-piece flow technique 26.2% 25.2% 25.2%
Parts/goods supermarkets 18.3% 14.4% 30.7%
Production leveling/heijunka 16.6% 14.1% 33.6%
RFID/computerized inventory tracking 12.5% 9.3% 20.0%
None of these 19.3% 21.4% 7.9%
Source: IndustryWeek/Manufacturing Performance Institute 2006 Census of Manufacturers, more than one response possible.
27Forging New Partnerships: How To Thrive in Today's Global Value Chain
Many of the nation�s Manufacturing Ex -
tension Partnership (MEP) centers have
Lean production is "lean" because
education and consulting programs focused
it uses less of everything when
on lean and are ready to help SMMs tackle
compared to mass production:
the challenge. In 2006 alone, nearly 25,000
half the manufacturing space, half manufacturers were served by MEP centers
the investment in tools, half the around the country (with nearly half of that
engineering hours to develop a new effort focused on improving manufacturing
systems). A conservative assessment of MEP
product in half the time. Also, it
effectiveness based on feedback from 5,261
requires keeping far less than half
clients for 2005 indicates that MEPs helped�
the needed inventory on-site,
�generate new sales of $2.842 billion;
results in many fewer defects and �retain sales of $3.408 billion;
produces a greater and ever-growing �deliver cost savings of $1.304 billion;
�create 17,453 jobs; and
variety of productions.
xiii
�retain 35,766 jobs.
Source: MIT International Motor Vehicles Program
In a connected supply-chain environment,
SMMs must also invest in enabling informa-
tion technologies that can improve produc-
base, and sales are now above 2001 levels, tivity. Too often overlooked in these strategies
xii
employment levels have been restored are the pipelines through which information
and the company was one of seven finalists flows. For example, broadband speeds in the
for the U.S. Chamber of Commerce Small United States are substantially slower than
Business of the Year award. Even with this what�s found overseas�1.9 megabits per
recognition, CEO Miles realizes that there second in the United States versus 61 mega -
are still opportunities for improvement, and bits per second in Japan and 45 megabits
that his firm�s next challenge is to get lean. per second in South Korea�putting U.S.
�We�re doing it because we know it works,� manufacturers and all of U.S. business at a
says Miles. Ive visited a number of friends connectivity disadvantage. The kicker is that
of mine that have plants similar to us that Americans often pay morefor slower service.
have been [applying lean for] a year or two, In addition, broadband speeds can vary signif-
and theyre seeing great benefits from that. icantly by state. For example, Rhode Island
And we just think that to stay competitive is touted as having the speediest networks
and build our business, that�s something we (5011 kilobits) versus the slowest in Alaska
have to do.� (545 kilobits).
Miles notes that lean not only offers a SMMs can help improve a state or national
low-cost approach to improvement, but one technology disparity by making their voices
that is supported by numerous academic, heard to their elected officials. More imme -
governmental and consulting resources. diately, SMMs can improve the infrastructure
Miles Fiber glass & Composites has been able and the capabilities of systems that do exist
to get grants from Oregon State University by selecting systems, vendors and applica-
and the local Economic Development tions that best support their needs. Those
Commission, so that our investment is needs are even more demanding as SMMs
mostly in-kind instead of out-of-pocket, expand their reach globally. Being able to
and that�s helped tremendously.� have systems communicate across a wide
28Forging New Partnerships: How To Thrive in Today's Global Value Chain
Chart 3. Information Technology Priorities
Strongly agree Strongly disagree
IT is increasingly
critical
Expanding use of
installed systems
Installing new
systems in 2007
More training would
make for better use
Will increase RFID
in 2007
Disaster recovery
system is in place
Our systems serve
our needs well
Security is a
"top three" in 2007
0 20% 40% 60% 80% 100%
Source: 2007 Manufacturing and Wholesale Distribution National Survey, RSM McGladrey, Inc.
range of geographies in real time is imper- Todays value chains demand that SMMs
ative. Flexibility and adaptability are requiredimprove their operations, technologies and
in IT systems because of the rapid pace of skills. Government and private resources
the global business environment in which are on the sidelines waiting to assist you
SMMs are operating. This is apparent to with those improvements. What are you
SMMs because about two-thirds of them waiting for?
�strongly agree or agree that information
technology is increasingly critical. Fifty-eight
percent are expanding use of their existing
IT systems and 50 percent believe that more
training would help them make better use
of existing technologies. Nearly half will
implement new systems in 2007 (see Chart 3
xiv
above).
29Forging New Partnerships: How To Thrive in Today's Global Value Chain
The Opportunity:
Operations Excellence, Innovation Edge
MMs must commit to innovation and new ways of doing business�in products,
S processes, technologies and strategies�that free up assets and open up selling
oppor tunities. A focus on innovation will keep you from becoming a stagnant operator
(incapable of improvement) or a commodity player (always under price pressures).
This is especially true during a period when many markets (e.g.,the defense industry
and green products) have insatiable appetites for something new. It�s a fact of manu -
facturing life that businesses big and small have embraced new ways of operating�
for example, lean manufacturing on the plant floor�and tools and cultures of inno-
vation for products and services.
High-quality products and on-time delivery Part of a continuous improvement mind-
no longer guarantee success. Customers set is the necessity to adopt lean principles
everywhere are looking for lower costs and of eliminating waste, improving processes
more�more support, more value-added serv- and only adding value to the product, says
ices, more innovation, more help in satis- Dick Strojinc of RSM McGladrey. In many
fying their customers�and theyre willing cases, I look at lean as being a way to make
to look anywhere to get it. Successful SMMs the value chain even more effective.�
are strategically aligning their organizations Independent of a companys size, he cant
to deliver extra value around the globe, imagine a manufacturer being�or wanting
from the simple (ensuring that materials to be�a global company without adopting
are delivered in right-sized containers at the principles of lean, when it makes sense,
the right time) to the complex (taking over as part of continuous improvement.
lifetime responsibility for industrial equip- Strojinc cautions SMMs about getting
ment, including maintenance) to the new caught up in one version of lean versus
(developing products for end-customers). another and, like many others, sees much
In order to deliver more than just good of lean as simply sound manufacturing
product, SMMs must first recognize that engineering. Just as lean evolved from the
the old equation of success� price = cost + Toyota Production System (TPS), TPS evolved
profit�no longer works. With competitors from the work of Henry Ford, W. Edwards
springing up around the globe, SMMs must Deming and others. But through all the
improve constantly to maintain profit and versions of lean, Strojinc points to Toyota�s
survive. From an operations perspective, seven deadly wastes as common threads.
successful SMMs have already embraced lean [It�s] the elimination of non-value-added
manufacturing and other forms of operational cost. If you do a good job of understanding
change on their plant floors and are now where your non-value-added costs are,
pushing the same concepts beyond their then you can apply the appropriate tools
factory walls (e.g.,front office, product to eliminate those costs.�
development, accounting) and into their Within the value chain, OEMs and major
own value chains. suppliers are pushing the responsibility
30Forging New Partnerships: How To Thrive in Today's Global Value Chain
for innovation down to smaller companies. bonuses to days off with pay and company-
New challenges arise, with new roles and wide recognition.
capabilities required of SMMs, including �A better-informed customer.It�s impor-
employees who can perform under these tant to communicate with your primary
new conditions. There are a number of new customer about your lean experiences and
communications channels that SMMs need new roles in innovating. Customers should
to put in place: understand that at times they need to
�A better-informed team.As your prod- share risks and costs for new product
ucts change, employees need to under- development if it is to be a successful
stand what would happen if new products partnership. The new value chain works
are not produced correctly. Stephanie best when there is that kind of trust and
Harkness at Pacific Plastics says, We mutual support within the chain. Many
are now making replacement heart valves SMMs report that this is too often missing.
and the liability risk for us is now much �A high-tech college partner.Local col-
greater than when we were making leges, universities and technical schools
components for laparoscopic devices. can provide tremendous assets for SMMs
Our team needs to be more educated with new innovation mandates, especially
on the repercussions of their actions when the local college has technological
and the relevance of the products they capabilities that the SMM does not have.
are making. Similarly, at Radix Wire, Kellie Johnson of ACE Clearwater calls
all employees are made knowledgeable this compute to compete and has turned
about the company and even view the to local colleges to help her company
income statement. simulate never-before-made parts for a
�A rewarded team.When your employees whole new unmanned aerial vehicle that
excel with innovative ideas, they deserve a major aerospace company has suggested.
recognition. SMMs vary in how they rec- This partnership will give her company
ognize their top performers, from cash a competitive advantage.
Improving Performance To Take the Customer to a Higher Level
Chuck VerMerris, president and CEO of Radix Wire Company in Cleveland,
Ohio, emphasizes that the manner in which Radix does business is as
important to the customer as the products and their prices and a key factor
in fending off foreign competition. "I can probably save our customer a lot
more money by having what he needs in a short period of time, and high
quality, so that he doesn't have to have much, or any, inventory," he says.
"We trade in our ability to make relatively small runs in a very short period
of time affordably. �We make a very aggressive effort to obsolete our own
products as rapidly as possible by creating something that is more advanced,
higher performance, more affordable or faster to make. That is the strate-
gy of our business. We listen skillfully to a user who wants to elevate his
requirements to a higher level of performance."
31Forging New Partnerships: How To Thrive in Today's Global Value Chain
"The most important thing is By using some of these procedures, the
following three manufacturers have mas-
that we got all of top management tered lean manufacturing.
totally involved in the process. Mary Andringa, CEO of Vermeer Manu -
And for us, it's a culture." facturing, says her company started its lean
journey in the 1990s to control manufactur-
Mary Andringa, CEO, Vermeer Manufacturing ing costs. At the time, an outside independent
director told the company that it was abso -
There are many paths to manufacturing lutely imperative to start understanding
innovation. We are highlighting some of the other production systems, kaizen, lean,�
ways in which innovation manifests itself recalls Andringa. Vermeer spent about two
in todays manufacturing. years sending staff to lean events and on
benchmarking trips and then began its lean
1. Innovating by Mastering Lean efforts in 1998.
Operational excellence these days is often �The most important thing I think is
tied to a true application of lean manufac- that we got all of top management totally
turing. Some see learning lean as straight- involved in the process, says Andringa.
forward as �And for us, it�s a culture. And everybody is
�reading and absorbing the lessons in The expected to be involved on events, at pre-
Toyota Way; sentations, supporting the work of the team,
�focusing on big piles in your plant; and sponsoring teams. And always looking for
�figuring out one piece flow so that employ- where the next breakthroughs are. Weve been
ees never put a part down until it is sent on this journey nine years and we believe
out the door. weve just started to scratch the surface.�
Companies that have succeeded with lean Today, the company has about 40 people
recommend that senior management have dedicatedto continuous improvement work,
a strong buy-in to the program to make it but Andringa notes, In reality, everyone is
effective. There must be a lean champion in dedicated to it. It�s 40 people that are very
your company to make these changes happen focused on helping all of the plants, all the
and make them stick. business units, to continually make improve-
With lean, work cells are often clustered ments, set up for [lean or kaizen] events and
to make the flow of goods faster and less do follow-up. Kaizen events are focused
complicated. Moving large pieces of equip- groups of cross-functional employees work-
ment around to do this may seem daunting ing on a specific problem for anywhere
to some managers. Kellie Johnson of ACE from one to five days; in Japan the term
Clearwater has some helpful advice for some - kaizen means continuous improvement.�
one just getting started. She says, There are Vermeer company officers have averaged
other ways to accomplish your lean goals with- participating in 22 kaizen events, and
out always moving large machinery. We call Andringa alone has participated in 34 events
it virtual cells, co-locating people as much asfocused on plant-floor issues such as total
possible. When we set it up, we identify a teamproductive maintenance as well as business
leader who has the overall responsibility for process events for the warranty process with
keeping the product flow going. Then, it�s all dealers and reimbursement of warranty
about flow, whether that person is right next claims. We use the process in every form
to you or on the other side of the floor.� of the business.�
32Forging New Partnerships: How To Thrive in Today's Global Value Chain
One big benefit of lean is the ability to doavailable workers time. In order to be a
more with less. For example, Power competitive manufacturer in the United
Curbers has enjoyed compound growth States that pays its people very well and has
rates of approximately 7 percent to 7.5 per- great benefits, all those things that used to be
cent since the early 1990s, says CEO Dyke commonplace in this country�you have to
Messinger, with earnings generally grow- be extremely focused on being an efficient
ing faster than sales. That�s because we or lean manufacturer, says Messinger.
have adopted lean manufacturing princi- Aspect Medical Systems in Newton, Mass.,
ples, and as a result of that, we really exemplifies the far-reaching operational
havent added employment. Employment benefits of lean for SMMs. Aspect produces
has been steady over that period of time.� innovative brain monitoring technologies.
Messinger says that some new jobs have The company won a Shingo Prize award in
2006 based on its pursuit of operational
excellence and the application of lean tech-
"In order to be a competitive
niques throughout the organization. Because
manufacturer in the United of lean, product cost of goods were reduced
by more than 50 percent on products that
States that pays its people very
generate greater than 70 percent of revenue,
well and has great benefits�
rework rates improved by 81 percent, scrap
you have to be extremely was reduced by 37 percent and customer
xv
service measures improved by 80 percent.
focused on being an efficient or
lean manufacturer." 2. Innovating Through New Products
Dyke Messinger, CEO, Power Curbers Lean and other state-of-the-art improvement
approaches enable SMMs to innovate how
been added, but better processes and they do what they do, the processes and
streamlined product lines are enabling Power operations. But you must not forget to inno-
Curbers to grow without commensurate vate the whoand what. A culture of innova-
levels of employment growth. That byproduct tion should permeate within the company,
of lean certainly doesnt solve the workforce fostered by CEOs rewarding innovative ideas
shortages that exist across industry, but, as inand risk-takers those always on the lookout
the case of Power Curbers, can make growth for new products, new market opportunities,
objectives more manageable. i.e.,an old product applied in an innovative
That�s not to say that lean is used to cut way, and new ways of doing business.
workforces. Lean companies often guarantee While most SMMs are launched by a spe -
(sometimes explicitly, sometimes not) that cific product or line of products, eventually
an employee�s efforts to improve a process they need to reinvigorate those products
wont result in the employee losing his or and/or thoroughly reinvent the business
her job. Why else would an employee be (which is more common then you might
driven to improve? SMMs also find that as think). Given their smaller markets and
operations become more efficient, the firm larger competitors, SMMs are uniquely
can redistribute workers into new areas, dependent on innovation for survival.
keeping staff employed and growing a cross- One of the things that American com-
functional workforce in the process. Ideally, panies, large and small, have done for years,
new business fills freed-up capacity and is American ingenuity; we do still create new
33Forging New Partnerships: How To Thrive in Today's Global Value Chain
products, says Thomas Murphy, executive hasnt pursued the backyard-fencing market
vice president of RSM McGladrey, Inc. You because it�s been cornered by Chinese manu-
need to figure out what your customers need facturers. Even without that, Knott says
before they know they need it. The entrepre- there are still many untapped markets. We
neur is generally the person in the small and can use the same equipment and the same
mid-sized company that is the true innovator. technical resources to make products that
They have the creativity, the energy, the are used where the market is, he explains.
knowledge of what the extension of their �The trick is if you�re capable of manufac-
existing product is, what the next product turing something, you just have to look for
can be. Hopefully theyre thinking that far those areas in which you can make money.�
ahead, because it will be ingenuity and new For Al-jon in Ottumwa, Iowa, a manufac-
products that keep U.S. manufacturers in turer of heavy-duty scrap-processing and
the lead.� solid-waste equipment, Europe was an area
Some manufacturers believe they cant where it could make money, but not without
compete against foreign competition. That�s first revising the size of its massive scrap-
not the case for James Knott, president and processing equipment. Many of their
founder of Riverdale Mills Corp., North - machines sold in the United States are 45 feet
bridge, Mass. In 1979, Knott bought a mill long and weigh up to 126,000 pounds, which
dating to 1852 and quickly set out manufac- is the legal limit in the United States but too
turing wire lobster traps. The business grew big for small European communities. So while
dramatically, as the exuberant Knott con- Al-jon hasnt reinvented its wheel, it has
vinced the lobster trade to replace heavier tweaked it with redesign, finding new cus-
wooden traps with his products. tomers and operating benefits as well�by
Knott met some skepticism, but eventually shrinking the machines, they can be shipped
the Riverdale Mills Aquamesh displaced as via container rather than bulk freight or on
xvi
much as 90 percent of the old wooden traps vessels, cutting costs considerably.
used in North America. However, due to the
longevity of the Riverdale Mills wire baskets 3. Innovating by Smart Use of
and the gradual emergence of foreign com- Government Programs
petition, Knott faced an eroding market. Tapping into federal and state programs
Since he�d grown his wire operation using and procurement is a third way to get your
state-of-the-art equipment and computer company into new markets. This includes
technology, Knott began looking for all the not only outright sales to government but
other markets�agricultural fence, aquacul- also taking advantage of the research and
ture, custom fences, land management, wire- advanced technology grants that are available
wall fences (such as those in prisons), and to help you realize your potential. Collaboration
cooling towers�for which he could make with governments is an ingredient for some
products. Lobster traps, which once accounted companies in giving them a stronger role in
for 100 percent of Riverdale Mills products, the value chain.
now make up just 30 percent. One-fourth of The NIST Manufacturing Extension cen-
Riverdale Mills products are shipped overseas. ters have worked extensively with companies
Market expansion and new products were on lean over the last decade, but recognized
an obvious solution, according to Knott. that process improvements and cost savings
�What you have to do is figure out what you were necessary but not sufficient for long-
can do, he says. For example, Riverdale term competition in the global economy. So
34Forging New Partnerships: How To Thrive in Today's Global Value Chain
Richards Industries Goes Lean
Richards Industries, with revenues of $26 million and 120 employees, is
a maker of a variety of industrial valves for the chemical, petrochemical,
pharmaceutical and food processing industries. Richards' revenues have
increased more than 20 percent per year for the last three years, but the
company faced ambitious growth targets: It needed to add $9 million in
new sales (excluding acquisitions) over the next 3 years.
Richards benefited considerably from implementing lean since 1999. Building
on that, 15 Richards employees participated in a Eureka! Winning Ways
session in November 2006. Richards' staff and MEP identified multiple
growth ideas and decided to focus on their Jordan Valve line of pressure
regulators, temperature regulators and pneumatic and electric control
valves. Sales of its sanitary valve line had languished, but the product had
great potential for growth, given the emergence of the biotech markets.
The company decided to pull out the sanitary valve line, rename it Steriflow,
and develop it as a stand-alone line with its own product manager, product
logo, identity and focus.
Since introducing its new product line, the company has doubled the revenues
for the Steriflow segment of the business and is currently booking more than
$250,000 in revenues per month. Steriflow is the fastest-growing product
line for Richards. Moreover, other ideas from the session are now being fed
into a pipeline for the company, creating a culture of continuous innovation.
NIST MEP launched a new growth services such as SBA grant programs: Small Business
product line�Eureka! Winning Ways�in Innovation Research (SBIR) encourages
the spring of 2007 that provides a proven, small businesses (fewer than 500 employees)
structured process for helping companies to explore and profit from their technologi-
grow with respect to new products, new cal potential. SBIR awards are based on small
markets and new sales. The service helps business qualification, degree of innovation,
companies think about opportunities for technical merit and future market potential.
growth, narrows those ideas down to the Similarly, the Small Business Technology
few most likely to succeed based on Transfer Program (STTR) expands funding
research and supports the company as they opportunities for innovation research and
explore feasibility and implement the most development, particularly expansion of
promising ideas. Most importantly, it cre- public/private partnerships between small
ates a renewable process for generating business and non-profit research institu-
new ideas that can be explored and imple- tions. STTR reserves a specific percentage
mented over time. of federal R&D funding for awards to small
Although SMMs sometimes struggle with busine