The Future Success of Small and Medium Manufacturers

The Manufacturing Innovation Series
The Future Success
Of Small and Medium
Manufacturers:
Challenges and Policy IssuesTable of Contents
Foreword............................................................ 3
Acknowledgements.................................................... 4
Introduction.......................................................... 5
Executive Summary.................................................... 7
The 15 Best Practices of SMMs.......................................... 9
The Manufacturing Economy.......................................... 10
Competitive Strengths of SMMs........................................ 13
External Challenges .................................................. 16
Long-Term Changes
Evolving Technologies and Customer Demands
Competing in the Global Marketplace
Structural Cost Issues
Skill Shortages and Educational Deficiencies
Bank Credit Policies and Interest Rates
Internal Management Challenges...................................... 34
Strategic Planning
Technology
Quality Management
Cost Control
Lean Manufacturing
Marketing
Exporting
Financial Risk Management
Capital Investment and Financing
Performance Measures
Corporate Governance
Management Succession and Estate Planning
Policy Issues: Legislative, Regulatory and International.................... 46
Regulatory Improvement
Energy Legislation
Trade Agenda
Tax Policy
Health Care Reform
Legal Reform
Educational Reform
Federal Funding and Tax Credits for Research & Development
Interview with the Assistant Secretary of Commerce for
Manufacturing and Services........................................ 51
Appendix: Government Resources for SMMs............................ 54
Endnotes.......................................................... 602006 by The Manufacturing Institute, the National Association of Manufacturers and RSM McGladrey, Inc.
All rights reserved.The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
Foreword
t has been five years since the National ¥8 million employees�60 percent of U.S.
I Association of Manufacturers and The manufacturing employment;
Manufacturing Institute last reported to its ¥62,000 exporters with many more supply-
membership on the state and future of small ing other exporters;
and medium manufacturers (SMMs). Much ¥more innovations per employee than
has happened in these short intervening years: large manufacturers.
an unprecedented attack on our country, an RSM McGladrey traces its roots back 80
economic implosion, a resurgence in the years, starting in America�s heartland and
economy tempered by the shadow of new serving both small and medium manufac-
and powerful competition from overseas. turers. Like many of you, weve expanded
What lies ahead is the subject of the booklet our scope, grown nationally and globally,
you hold in your hands. and become more sophisticated offering a
RSM McGladrey is pleased to sponsor this combination of complementary corporate
special report: The Future Success of Small and individual tax, audit*, accounting and
and Medium Manufacturers: Challenges and consulting services. The one constant has
Policy Issues. In these pages you will learn been our continued dedication to serving
more about the current challenges faced by SMMs. With nearly 6,000 manufacturing
SMMs, the policy changes and steps required clients across the country, we have a clear
for the United States to retain its place as understanding of the issues confronting
the worlds leader in manufacturing, the SMMs and the environment in which
latest in best practices and more. you operate.
In the face of many challenges, the future U.S. manufacturing remains second to
for SMMs remains bright. SMMs hold the none. But this is not a time for complacency�
key to the U.S. manufacturing sector, the it�s a time for action. Your guidepost and
viability of our national economy and, just roadmap are within these pages. We are
as importantly, to the communities in which proud to be associated with the NAM, The
they have established their businesses. This Manufacturing Institute and its members.
is evidenced by: We all need to continue to work together
¥40 percent of the total value of U.S. to make it happen.
production;
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 can work together to serve clients business needs. RSM McGladrey and McGladrey & Pullen are members
of RSM International, an affiliation of separate and independent legal entities.
3The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
Acknowledgements
he Manufacturing Institute, RSM Last but by no means least, we want to
T McGladrey and the National Association thank the bakers dozen of manufacturers
of Manufacturers (NAM) want to thank and who are quoted in this report, for their
recognize the many individuals who helped insights and their willingness to help us
develop and issue this report. We are grate- shape a document that is highly relevant to
ful to NAM President John Engler and The todays SMMs:
Manufacturing Institute President Jerry Karla Aaron, Hialeah Metal Spinning,
Jasinowski for encouraging us to proceed Hialeah, Fla.
with this publication and their own good Mary Vermeer Andringa, Vermeer Manu-
ideas for improving the initial drafts. facturing, Pella, Iowa
We are fortunate that RSM McGladrey, David Bobrek, Blasch Precision Ceramics,
a business services organization based in Albany, N.Y.
Bloomington, Minn., which works exten- Collie Hutter, Click Bond, Carson City, Nev.
sively with small and medium manufacturers Roger Joyce, The Bilco Company,
(SMMs), partnered with us on this project. New Haven, Conn.
We thank McGladreys Executive Vice Kendig Kneen, Al-jon, Ottumwa, Iowa
President Thomas G. Murphy for his vision Gerry Letendre, Diamond Casting &
to see the importance of reissuing this Machine Co., Hollis, N.H.
booklet, for underwriting it and for his Al Lubrano, Technical Materials,
time and involvement in its writing. Lincoln, R.I.
We thank Henry A. Davis, our author, for Dyke Messinger, Power Curbers, Inc.,
his comprehensive proposal, diligence in Salisbury, N.C.
interviewing so many business owners and Tony Moore, The Glove Corporation,
extensive research. We very much appreciate Heber Springs, Ark.
the interview that Assistant Secretary of Ronald Moquist, Raven Industries,
Commerce for Manufacturing and Services Sioux Falls, S.D.
Al Frink provided for this report. Bob Piazza, Price Pump, Sonoma, Calif.
The Manufacturing Institute managed the Fletcher Steele, Pine Hall Brick
writing and production of this report. We Company, Inc.,Winston-Salem, N.C.
would like to thank Vice President Phyllis
Eisen and Managing Director of the Center
for Workforce Success Stacey Wagner for
their advice and counsel.
At the NAM, many thanks to those who
gave us their good ideas and suggestions from
beginning to end: SMM Director Jeff Noah;
Chief Economist David Huether; Art Director
Irina Stepanova; Editors Patrick Connole
and Marissa Gandelman; and all of the NAMs
policy departments that know SMMs so well Bill Canis,
from their work with them on legislative Vice President and Executive Director
and regulatory issues. The Manufacturing Institute
4The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
Introduction
mall and medium manufacturers (SMMs) time to take a new look at SMMs in America
S have been a key part of the American in 2006. The purpose of this report is to:
economy for generations. About 1870, when ¥Remind policymakers and the media about
Ulysses S. Grant was not even at the midpoint the vital role of SMMs in the economy;
of his first term as president, Calculagraph ¥Discuss pending federal legislation
Company was founded as a maker of watch impacting the future of SMMs;
parts. Decades later, the New Jersey-based ¥Describe the external and management
company reinvented itself and helped usher challenges faced by SMMs;
in a new telecommunications era when it ¥Highlight government programs that can
became a manufacturer of clocks used by be of help to SMMs;
the phone company to record the timing of ¥Showcase some of todays successful
long-distance calls. SMMs in their own words.
This small company with 60 employees Today, America�s economic position is
is still in business today under the name of being challenged by rapidly growing econo-
Control Products. Like all successful SMMs, mies around the world. Once again, American
Control Products has innovated to stay ahead ingenuity and drive must be summoned
of the competition, now making sealed, to retain manufacturers competitive edge
waterproof switches and patented linear in the changing global marketplace of the
position sensors for industrial applications 21st century.
that were entirely unknown in Grant�s day. SMMs are playing a vital role in respond-
Innovation, flexibility, speed to market ing to these competitive challenges and are an
and closeness to the customer are charac- important part of the solution. Strengthening
teristics of successful SMMs. These small the hand of SMMs will enhance the nation�s
company traits are critical components of overall ability to adapt in order to compete
the free enterprise economy that has made and succeed in the decades ahead.
the United States the most successful Two trends are increasingly shaping the
industrial country in the world. future of SMMs. First, large manufacturers
The NAM defines small manufacturers are increasing their dependence on suppliers
as companies with 500 or fewer employees of parts as they streamline their own opera-
and medium-sized manufacturers as those tions. This has been a positive growth story
with 2,500 or fewer. SMMs have been the for many SMMs as they have expanded
bedrock of NAM membership since our businesses into areas formerly owned and
founding in 1895. operated by large manufacturers. But it has
The NAM and The Manufacturing Institute been a double-edged sword, as the pressure
published their first report on SMMs in to reduce prices is passed down the supply
2001, in the twilight of the 1990s prosperity chain with the burden for cost reduction
boom and before the major recession that and innovation increasingly falling on
engulfed most of manufacturing well into SMM suppliers.
2003. Some SMMs closed their doors in The second trend�the development of
those years, the most severe manufacturing increasingly sophisticated production in
recession in decades. With the manufactur- developing countries�cuts the other way
ing economy beginning to recover, it is and has toughened the landscape for all
5The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
manufacturers, including SMMs. To stay in business plans. Ultimately, SMM entrepre-
business, SMMs have to offer value to their neurs take responsibility for their own
customers that low-cost overseas competi- success; and it is their inventiveness, dedi-
tors cannot match, such as proprietary, cation and daring that have helped make
high-technology products; a willingness to the U.S. economy the vibrant powerhouse
customize; extraordinary service and parts that it is today.
support; short production runs; and fast Our report is written primarily for policy-
turnaround time. These trend lines make makers who may not appreciate the contri-
clear that the performance of all of U.S. butions and challenges faced by SMMs in
manufacturing is tied more than ever to the their own states. Elected officials who want
success of SMMs. to see their SMMs prosper should heed the
This report is also addressed in part to recommendations for better public policy
SMMs, with our hope that some of the 15 best discussed in this report.
practices shared here will strengthen their
John Engler Jerry Jasinowski
President and CEO President
National Association of Manufacturers The Manufacturing Institute
6The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
Executive Summary
hile small and medium manufacturers ¥educational and skill deficiencies at all
W (SMMs) in the United States are being levels from engineers and scientists to
challenged as never before, they continue to factory employees.
make a vital contribution to the U.S. economy While the United States remains the worlds
and exhibit numerous competitive strengths. leading innovator in terms of research and
This report identifies 15 best practices that development and patents granted, other fast-
are followed by successful SMMs. growing economies are catching up, partly
The SMM profile: small manufacturers because more of their students are earning
are companies with fewer than 500 employees degrees in math, science and engineering.
and medium-size manufacturers are those The combination of high energy and health
with fewer than 2,500 employees. While care costs, retirement benefits, tort litigation
leading SMMs keep abreast of current legal, costs, regulatory compliance costs and taxes
legislative, regulatory and other policy issues,add more than 22 percent to U.S. manufac-
they take responsibility for their own success turers unit labor costs compared to our
in efforts to differentiate themselves and principal foreign competitors, and SMMs are
achieve competitive advantage in todays hit disproportionately hard by these costs.
global economy. They � As foreign competitors, particularly from
¥number more than 296,000; China, continue to drive world prices down
¥represent more than 99 percent of and structural costs continue to increase,
the nation�s manufacturers; SMMs are suffering a profit squeeze.
¥account for 40 percent of the value SMMs also face a range of internal
of U.S. production; management challenges. Working with
¥employ more than 8 million men finite financial and human resources, prin-
and women; cipals of SMMs are constantly prioritizing
¥increasingly export: 95 percent of all among managerial challenges. While run-
manufacturers that export are SMMs, ning day-to-day operations, the SMM owner
responsible for 15 percent of the nation�s or manager is also looking to the longer term,
manufactured goods exports. defining the companys competitive niche
SMMs, almost all privately owned, have in terms of product and marketing strategy,
important competitive strengths. They are developing export markets, keeping abreast
close to the customer, responsive, flexible, of technology, choosing among capital
innovative and entrepreneurial. As such, investment opportunities, reducing waste
they offer attractive career opportunities for through lean manufacturing techniques
bright, ambitious employees who, in turn, and demonstrating quality management
reinforce their competitive strengths. through ISO certification.
External challenges for SMMs in the Among the NAMs current policy priori-
United States today include: ties most relevant to SMMs are:
¥evolving technology; ¥increasing offshore natural gas develop-
¥changing customer demands; ment to relieve supply shortages and
¥competing in the global marketplace; price increases;
¥high costs, especially energy and ¥providing fuel flexibility during high
health care; energy seasons;
7The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
¥finding qualified employees to replace technical schools and business-education
high-skilled retiring employees; partnerships represent a joint government-
¥reining in health care costs; business effort to narrow the skills gap.
¥obtaining market-determined exchange Through a recently established Office of
rates; Manufacturing and Services, the Department
¥reducing the trade-distorting effects of of Commerce has taken numerous initiatives
high overseas tariffs and differing tech- to coordinate various government agency
nical standards and testing; regulations relevant to manufacturers. The
¥fostering adequate intellectual property report includes an insightful interview with
protection; the first assistant secretary for manufactur-
¥improving the nation�s legal system; ing and services, Al Frink.
¥making recently enacted tax relief per- SMMs are taking advantage of Commerce
manent, including estate tax repeal and Department services for exporters, consult-
lower tax rates. ing Manufacturing Extension Partnerships
Leading SMMs are moving toward defined (MEPs) on a full range of business manage-
contribution approaches such as Health ment and technical issues, and Small Busi-
Savings Accounts and Health Reimbursement ness Administration loan and R&D funding
Arrangements to contain their health care programs, while becoming involved in local
expenses. The NAM supports legislation to Workforce Investment Boards to ensure that
curtail frivolous lawsuits and to establish a Department of Labor employment and job
privately sourced trust fund to rein in training programs are meeting their needs.
asbestos litigation. Public funding for work- The appendix to this report is an SMM guide
force development in community colleges and to many of these government resources.
8The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
The 15 Best Practices of TodayÕs SMMs
hile there are many best practices 9. Appoint a majority of outsiders with
W followed by leading SMMs, there are relevant and diversified business expe-
15 characteristics that are key to success in rience to your board of directors or board
todays global market: of advisers; look to those outside direc-
1. Stay in touch with customers, talk to them tors or advisers for opinions and advice;
about their needs and look to them for welcome their challenge.
new product ideas. 10. Develop a plan for management succes-
2. Differentiate products and services to sion. Start estate planning early and
better define and develop a competitive continually keep abreast of estate tax laws
advantage. and regulations.
3. Devote the necessary time and energy to 11. Monitor your companys viability and
marketing; develop a distinctive product competitiveness on a daily, weekly and
and marketing strategy; expand and monthly basis with a set of key perform-
diversify your customer base. ance indicators (KPIs) tailored to your
4. Go global. Develop export markets. companys particular business challenges.
5. Ensure that your activity-based cost 12. Weigh both quantitative and qualitative
system is helping your company contain factors in making capital investment
cost increases, focus on which activities decisions. Strike a balance between
are consuming the most resources and staying on top of technology and making
highlight non-value added activities. investments you cant afford; no company
6. Look for a long-term relationship with has unlimited resources.
a banker who is willing to take the time 13. Constantly look for opportunities to
and effort to understand your company. delegate, to empower your employees at
7. Invest at least 3 percent of your payroll all levels and to create the corporate cul-
in employee training; get involved with ture for a high-performance workplace.
Workforce Investment Boards (WIBs), 14. Speak out to your government represen-
government-sponsored training pro- tatives at the federal, state and local levels.
grams and local educational institutions 15. Stay abreast of legislative, regulatory and
such as community colleges that offer policy developments through the general
training in manufacturing skills. media, business publications, and indus-
8. Explore how experts from a Manufactur- try, trade and professional organizations
ing Extension Partnership (MEP) center such as the NAM (www.nam.org).
can help you with your business.
9The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
The Manufacturing Economy
ccording to government statistics, small the brunt of the recession, with 19 percent
A businesses, defined as all non-farm, of those companies (with 1,0001,499
private-sector businesses with fewer than employees) going out of business or
500 employees, create two-thirds of all new merging, almost twice the average decline
private-sector jobs in the United States, for all of manufacturing.
employ more than half of all workers, and ¥The recession�s impact on all manufac-
account for more than half of the output of turing establishments was even more
the U.S. economy. Add in medium-sized pronounced. Establishments include
manufacturers with 2,500 employees or less, all plants and operations of manufactur-
and it is clear this segment of American busi- ing firms and, during this period, the
ness has a significant impact on the economy. number of establishments declined by
Small and medium manufacturers (SMMs) 13 percent. A portion of the medium
account for 40 percent of the total value of manufacturing category, however,
U.S. production and employ more than 8 declined by 26 percent. The data also
million people. That represents nearly 60 show that the number of large manu-
percent of U.S. manufacturing employment. facturing establishments declined by
More than 218,000 small businesses 26 percent.
export. That is nearly triple the number that ¥A similar picture emerges for employment,
exported 10 years ago; 62,000 of these with the largest declines�28 percent�
exporters are SMMs. And many small busi- occurring in the same medium-sized
nesses are indirect exporters, serving as sub- and large manufacturing firms. Small
contractors or suppliers for larger companies manufacturers lost 16 percent of their
that export. Small businesses average more workforce from 1997-2002.
than twice as many innovations per employee Although the recession ended in 2003,
1
as larger corporations.However, there is a the Commerce Department does not have
high risk factor as well. An estimated 10 reliable data to indicate how many manu-
2
percent of small businesses fold each year. facturing firms there are today. Based on the
It�s well known that during the 20002003 flat employment line in manufacturing, with
recession more than 3 million jobs in manu- few manufacturing workers being added to
facturing were lost, or about 15 percent of payrolls since 2003, it is unlikely that it has
the total manufacturing workforce. changed measurably since 2002. At least two
Less well known are Commerce Depart- conclusions can be drawn from this data:
ment data that show that between 1997 and ¥Policymakers in Washington and state
the low point of the recession in 2002: capitals have not been tuned in to the
¥The total number of manufacturing firms impact that poor public policy is having
in the country dropped by 11 percent from on all of manufacturing, but especially
333,000 to about 298,000. Small manu- the key medium-sized segment; and
facturers account for 294,000 of these ¥Smaller manufacturers weathered the
firms and medium-size firms 3,000 with recession better than larger firms,
the remainder large manufacturers. A showing the resilience and flexibility
portion of the medium-size firms bore that this report describes in detail.
10The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
Too few people realize that the United The U.S. manufacturing sector leads
States is still the worlds leading manufac- in innovation, accounting for 57 percent
turer, producing 75 percent of what it con- of industrial R&D. The new products and
sumes. Manufacturing makes six important processes developed in manufacturing con-
contributions to todays economy: tribute significantly to U.S. competitiveness,
U.S. manufacturers produce more today economic leadership and the current high
than at any other time in U.S. history. standard of living.
Standing alone, the U.S. manufacturing Manufacturing is the workhorse that
sector would represent the eighth-largest pulls the wagon of U.S. productivity. From
economy in the world, nearly equal to China�s 1994�2004, productivity in U.S. manufactur-
entire economy (see Chart 1 below). ing grew by 4.5 percent per year, largely as a
Manufacturing is one of the primary result of capital investment in increasingly
engines of wealth generation in America, automated equipment, while productivity in
pumping out $1.4 trillion in annual output, other non-farm sectors of the economy grew
employing more than 14 million workers, and at a rate of only 2.7 percent per year. Increased
accounting for 12 percent of GDP and two- productivity leads to higher returns on capital
thirds of exports of goods and services. From invested and enables managers to increase
2002�2004, manufacturers contributed worker pay. The innovation and productivity
15 percent of U.S. economic growth, larger growth stemming from the manufacturing
than any other sector. Manufacturings strength sector over the past two decades has under-
is partly the result of a multiplier effect. Forpinned our success in international markets,
every dollar of manufactured goods produced, helped drive productivity growth in the service
an additional $1.37 of economic activity is sector, provided high-quality jobs and raised
generated, as shown in Chart 2 on page 12. the standard of living throughout the country.
Chart 1. U.S. Remains the Global Leader in Manufacturing
11The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
Chart 2. Manufacturers Generate More Activity Than Other Sectors (ÒThe Multiplier EffectÓ)
Manufacturers offer high-skill, high- exports, according to Department of
wage jobs that pay an average of 23 percent Commerce and Small Business Administra-
more than the average wage earner in other tion data. The NAMs annual Small and
sectors of the economy�as shown in Chart Medium Manufacturers Operating Survey
3
3�and 50 percent more than retail salaries. shows that in 2005, exporting resumed its
A recent survey by the NAM, The Manufac- growth for SMMs after a fall off after 2000.
turing Institute and Deloitte Consulting LLP Nearly 10 percent of SMMs report that their
shows that manufacturers value a high-per- exports are more than 25 percent of sales, up
formance workforce as the most important from only 4 percent of companies reporting
factor in their firm�s future success, followedthat level of exporting six years ago.
by new production innovation and lower Chart 3. Manufacturing Pays Premium Workforce
costs. The higher wages and benefits offered Compensation
by manufacturers, when clearly understood
by younger Americans, remain strong
employment attractions.
Manufacturing is responsible for two-
thirds of all U.S. exports of goods and
services. That�s about $50 billion a month
exported, compared to agriculture, which
exports that much in a year. Small manufac-
turers play a vital role in exports. Ninety-five
percent of exporting firms have less than
500 employees, and those firms are respon-
sible for 15 percent of the nation�s goods
12The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
Competitive Strengths of SMMs
hile all small businesses face robust with a foreign supplier�particularly one
W competition from domestic competi- in Asia.
tors, most small manufacturers also face Responsive and Flexible. To be competi-
intense competition from overseas as well. tive, an SMM can offer fast turnaround time
That�s because manufacturing is more engaged and often is willing to take orders for small
in international trade than service business- production runs that would be uneconomical
es. More than 40 percent of manufacturing for a buyer to contract overseas. Flexibility
output is composed of combined exports and of course can be both a competitive strength
imports; double the level of trade engage- and a challenge for a small manufacturer.
ment 20 years ago. That compares with only With just-in-time manufacturing, order
about 5 percent of the output of non-manu- sizes have become smaller and timely
facturing being trade delivery is critical.
engaged. Large and small ÒIn the long run, we are Furthermore, the
manufacturers alike are subject to the same forces asparts an OEM out-
simply more competi- sources to SMMs can
tively involved in the a large, publicly held company, be the ones that are
global marketplace than but in the shorter run, I thinkmost difficult and
any other sectors. we can be more nimble.Ó costly to make.
Competition from so Every year, the
many sources makes it Gerry Letendre, president, NAM surveys its
imperative that SMMs Diamond Casting & Machine Company SMMs. More than 80
continually re-examine their competitive percent of the SMMs responding to the
strengths. Indeed, SMMs have vital com- NAMs 2005 Small and Medium Manufac-
petitive strengths in being close to the cus- turers Operating Survey are private, family
tomer, responsive, flexible, innovative and or individually owned. They are often more
attractive places to work for the brightest flexible in their day-to-day operations than
and most ambitious employees. Most publicly traded companies. As a result, they
importantly, they are willing to take risks can be more willing to invest for the long
and have the entrepreneurial determina- run and have more flexibility in managing
tion to succeed. their skilled workers during downturns.
Close to the Customer. One SMM advan- In the long run, we are subject to the
tage is simply their location; their proximity same forces as a large, publicly held com-
to original equipment manufacturers (OEMs), pany, but in the shorter run, I think we
large retailers, other SMMs and end users. can be more nimble, said Gerry Letendre,
Proximity to large buyers reinforces an president, Diamond Casting & Machine
SMMs position in the supply chain. All Company, a 60-employee producer of alu-
other factors being equal, it is more con- minum components based in Hollis, N.H.
venient for an American buyer to deal with a �We dont have Wall Street people question-
supplier or subcontractor within the United ing us about our quarterly results. When our
States than it is to cope with different lan- sales and profits dropped during the reces-
guages and regulations, longer lead times sion in 2000, we didnt lay off any of the
and overseas transportation as required employees; we had worked hard and spent
13The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
money to train. Instead, we postponed our Our engineers are constantly studying cur-
plans to purchase a new, computerized rent trends in aircraft manufacturing. They
drilling machine and reinvested our capital spend a lot of time on planes and as much
to introduce new products and build up time as they are allowed on the plant floor
inventory. During good times we set cash watching people build planes.�
aside so we can sustain the not-so-good Innovation is in Click Bonds DNA. It is
times comfortably.� a subsidiary of a family-owned company that
Innovative. SMMs have always found originally earned its revenue strictly from
that the best long-term strategy is innova- R&D: developing new products, getting
tion and, in particular, exploiting the U.S. patents and licenses, and doing the initial
technological lead over trading partners. manufacturing before selling the licenses
Despite recent efforts by competitors such to other companies.
as China and India to train scientists and
engineers to move up the value chain, the ÒTo survive in manufacturing
United States is still the worlds leader in
innovation and technology. today, you have to keep
Basically, if you are making commodity bringing new, innovative products
products, you cant afford to do it in this
country, especially if you are a small compa- to the market.Ó
ny,� observes Collie Hutter, chief operating Collie Hutter, COO and owner, Click Bond, Inc.
officer and owner of Click Bond, Inc., a
Carson City, Nev., manufacturer of propri- Entrepreneurial. Never to be underesti-
etary fasteners designed for adhesive bond- mated among SMMs� competitive strengths
ing that are used primarily in the aircraft is a uniquely American brand of entrepre-
industry. The one thing this country still neurial initiative, drive and determination.
has going for it is innovation. It is part of us,Small-business entrepreneurs are not
somehow, and it is what we do best. How interested in just making money; they are
long we can hold on to this leadership posi- striving for a much broader sense of
tion, I dont know. But to survive in manu- achievement. They are usually doing what
facturing today, you have to keep bringing they want to be doing and their identity and
new, innovative products to the market. sense of self worth is tied up in their busi-
�We sell not only innovation but also ness. With confidence in their vision and
extremely high quality to meet the standards personal stakes in the outcome, owners of
set for aircraft manufacturing. One of the SMMs are sometimes willing to take greater
reasons we can survive is that we sell on the risks than managers of public companies.
basis of installed cost. We are not competing It is easier for entrepreneurs to come up
head to head with an ordinary nut or bolt with new ideas in the United States than in
that can be made in another country. We other countries because of the freedom they
have a large engineering department for a have, Hutter said. Whether by history,
company of this size, and just a week ago we nature or both, this has always been a nation
had our 14th patent issued. We are not a of innovators. You can still dream of going
job shop and we do not design to customer out to your garage, tinkering around, com-
needs, but many of our new product and ing up with something, and building it into
product-enhancement ideas come from a nice company. It is done over and over
observing what our customers are doing. again in this country; it is socially accepted
14The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
and it�s expected. We are not expected to do A Positive Force in the Community.
things just as our fathers did, but rather to In addition to the taxes that SMMs pay to
strike out and find our own fortune. And of support local governments and schools, they
course we have the educational system and also support local programs that enhance
the financial resources to support this communities across the country. SMM
entrepreneurial activity. owners normally live and work in the same
Attractive Places to Work. Manufacturers communities as their employees, so they
generally pay higher wages than other non- often have firsthand knowledge of their
manufacturing small businesses. In addition, employees and the needs of the local com-
the benefits offered are generally more exten- munity. Through their philanthropy, they
sive, including health care, tuition reimburse-make a difference in improving the quality
ment, 401(k) and other pension benefits. For of life, the schools and the local cultural
SMMs who export, surveys have shown that institutions.
they pay a premium wage above the regular Williams-Pyro in Fort Worth, Texas, a
manufacturing wage. In addition to wages small manufacturer of electronic test equip-
and benefits, SMMs offer job advancement ment, founded the Williams-Pyro Firefighters
opportunities that may not be as readily Fund in 1999 when local firefighters died
available in larger companies. With lean staffsfighting a nearby church fire. The fund pro-
and minimal hierarchy, SMMs can give their vides financial assistance to families when a
employees a wider range of responsibilities firefighter is killed or injured and also
than they could get elsewhere. In this way, an helps volunteer fire departments buy new
SMM owner who is willing to delegate and equipment. It also made a major contribu-
empower can attract the brightest and most tion for new equipment to a Mississippi
ambitious employees, thereby enhancing community ravaged by Hurricane Katrina.
the companys competitiveness.
15The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
External Challenges
o matter how great the opportunities to new opportunities and far greater success
N are, every business faces challenges. in the long run.
Among the external challenges faced by SMMs
Evolving Technologies and
in the United States today are long-term
structural shifts in the industrial landscape, Customer Demands
rapidly changing customer demands and As technologies continue to advance, custo-
technologies, foreign competition, unfair mers expect more and more. No longer can
trade practices, worker skill shortages and a manufacturer produce a standard line of
interest rate and credit cycles. They also products with an occasional innovation and
face a host of structural cost issues that put expect to hold on to its customer base. Manu-
U.S. manufacturers at a competitive disad- facturers today must innovate continuously
vantage compared with our principal trade to remain competitive in the global market.
partners, including, energy costs, employee Innovation poses a particular challenge to
benefit costs, tort litigation costs, regulatorysmall manufacturers. It isnt just a matter of
compliance costs and high tax rates. All of budget allocation. Human capital resources,
these challenges affect manufacturing as a already stretched to meet daily business and
whole. We highlight the ones that are partic- production requirements, must be stretched
ularly relevant to SMMs and provide exam- even further to pursue new ideas. And there
ples of how leading SMMs are responding are no guarantees. Hundreds of hours and
to them. thousands of dollars can be invested in
projects that encounter unforeseen diffi-
Long-Term Changes culty and end up not contributing returns
The face of American business has changed that were expected.
significantly over the past two generations, Innovation, of course, must have a source.
particularly in the older industrial cities thatSuccessful SMMs we interviewed develop
used to be the headquarters for major heavy- new product ideas by diligently researching
industry companies. Around each of those and keeping up with their industries and,
cities are hundreds of small manufacturers most importantly, by keeping in constant
that serve the large ones. When a large manu- contact with their customers.
facturer fails or is acquired, many small �We talk to customers not only about
manufacturers lose their principal sources product design but also about operating
of business. And no SMM today can rest in factors most crucial to them and how we can
the assurance that customers or the products address those factors, noted Mary Vermeer
they buy will stay the same for very long. To Andringa, co-CEO of Vermeer Manufac-
survive, SMMs often have to figure out new turing Company, a 2,000-employee, pri-
things to do, and sometimes that requires vately held construction and agricultural
fundamentally changing the way they do equipment manufacturer based in Pella, Iowa.
business�acquiring new skills, investing Equipment reliability and commonality of
in new equipment, and exploring new mar- platforms and parts are top customer con-
kets�both domestic and international. For cerns. Understanding customer needs
SMM owners and managers, the transition requires not just talking to customers, but
can be expensive and risky, but often it leads visiting job sites and talking to operators.
16The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
Andringa explains, We have participated lean manufacturing using cell production.
in weeklong programs with customers on Rather than processing multiple parts before
their construction sites, watching how they sending them on to the next machine or
are using our equipment, how much time process step, cellular manufacturing moves
they spend looking for things, and whether products through the manufacturing process
they are having problems with certain con- one piece at a time determined by customers�
struction processes or with the equipment needs. Production work stations and equip-
itself. Then we question what we can do to takement are arranged in a sequence that supports
some waste points out of their processes. a smooth flow of components through the
These sessions with our customers are similar production process with minimal transport
to kaizen events we have on our own factory or delay. A typical work cell might have five or
floor.� In a kaizen event, a multifunctional ten people and a similar number of work-
team spends a day or several days focused stations arranged in a compact layout. Using
on how to simplify, a tool called value
ÒWe talk to customers not
speed up and eliminate stream mapping, a
only about product design but
waste from a particular coded graphical analysis
process like an assembly also about operating factors of the manufacturing
operation in a factory. process, Moore and his
most crucial to them and how
(Kaizen events are colleagues first imple-
we can address those factors.Ó
an important part of mented cell production
Vermeer Manufac- Mary Andringa, co-CEO, with the Fireglove
Vermeer Manufacturing Company
turings lean manu- product line and then
facturing program, discussed later in moved on to other products. Customer
this report.) delivery times have been reduced from 22
Thousands of SMMs have turned to the days to 3 days, a $600,000 backlog is now
Manufacturing Extension Partnership (MEP) built to order, Fireglove productivity has
in their state for help with market analysis, been improved by 40 percent and required
adapting modern technologies, adding work- floor space for production has been
force skills and developing a more strategic reduced by 40 percent.
vision. The benefit of partnering with a
nearby MEP is seen in the results that an Competing in the Global Marketplace
Arkansas SMM experienced. The global marketplace offers SMMs both
The Glove Corporation, based in great rewards and great challenges. On one
Alexandria, Ind., handcrafts gloves for mili- hand, they are facing the most intense global
tary, fire, utility and government use. Estab- competition in history, which has caused
lished in 1952, the company has 53 employees. manufacturing product prices to decline
Shortly after joining the company as general while non-production costs continue to
manager in 2003, Tony Moore saw opportu- escalate. On the other hand, the reduction of
nities to improve its the operation at its Hebertariff and non-tariff barriers in a growing
Springs, Arkansas, facility. Through a Lean number of markets affords SMMs excellent
101 event at Arkansas State University, Moore opportunities to expand their business and
was introduced to Arkansas Manufacturing reach customers that might have been out
Solutions (AMS), a NIST-MEP network of range only a few years ago.
affiliate. After a review of the plant, AMS The challenges are formidable. Foreign
project managers recommended a plan for competition, notably from China, has cut into
17The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
U.S. manufacturers market shares because must try to meet the China price, which can
many foreign-based companies enjoy lower be below the SMMs manufacturing cost.
labor costs and face less stringent environ- Al Lubrano, president of 200-employee
mental, workplace safety, health care and Technical Materials in Lincoln, R.I., testified
pension regulations (see Chart 4). Developing on behalf of the NAM before a congressional
nations ability to produce goods in bulk at committee in 2005 about competing with
low cost, combined with global overcapacity China. As a result of fierce Chinese com-
in many industries, have kept consumer petition, fueled partially by the undervalued
prices stable or even declining despite high- yuanand possible other unfair trade prac-
er operating costs in the United States. For tices, I have seen many of our customers lose
example, as China has expanded produc- their business because their customers
tion in textiles, apparel, metal products and have sought refuge in one of two strategies:
furniture, U.S. producers find they cannot either simply moving production to China
match the lower prices offered by their or forcing purchasing from lower-cost
Chinese competitors. Chinese manufacturers. It is common for
SMMs are affected by foreign competition our customers to tell us that their customers
both abroad and at home. They are compet- will only pay the Chinese price. And I am
ing with low-cost foreign producers both in afraid we are just at the beginning of the
their export markets around the world and process, with matters threatening to get
in their domestic U.S market. They also face much worse.
increasing cost pressure from their large On the other hand, we are not without
manufacturing and retailing customers, distinct advantages in U.S. production. Right
which have the option of sourcing overseas. now, my company is selling high technology
To keep a large U.S. customer, an SMM often precious metal-plated material systems to
Chart 4. Import Competition Growth Faster Than Export Opportunities
18The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
stamping companies in China that are unable are now competitive in selling machine tools,
to procure the high-quality product they need printed circuit boards, electronic hardware
from a Chinese or other regional local sup- of all kinds and even advanced telecommu-
4
plier and therefore are buying from us. Our nications networking gear.
technology and innovation have kept us ahead The United States still leads the world in
of the curve with some of our customers, but innovation, as evidenced by measures such
it is not going to be enough if we dont addressas R&D expenditures and the number of
the problems in our trade with China.� utility patents granted. But Japan is not far
Until recently, low-technology products behind in patents and the fastest growing
produced by relatively unskilled workers economies in the world as a group�China,
accounted for a large part of U.S. manufac- Ireland, Israel, Singapore, South Korea
turers competition from developing coun- and Taiwan�are gradually catching up to
tries such as China, India and Thailand. the United States in R&D expenditures
Now competition is broadening further as (see Chart 5).
businesses in those countries move up the
manufacturing value chain. Today, manu- Trade Agreements Creating
facturers in China and other developing New SMM Opportunities Abroad
countries are competing in the world market Trade is becoming increasingly important
based on not only low labor costs, but on to U.S. manufacturers, including SMMs.
huge production scale, the latest manufac- Commerce Department data show that one
turing technology, massive investment in out of every five manufacturing jobs in the
new industrial parks and the entrepreneur- United States is directly related to exports.
ial zeal to do whatever it takes to satisfy theAnd manufactured goods are also the most
needs of the largest OEMs and retailers. They important part of overall U.S. trade, account-
Chart 5. Fastest Growing Economies Gaining Rapidly on United States in Total R&DInvestments
19The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
ÒThere is huge imbalance times as high. My equipment faces duties of
14 percent in Brazil, 15 percent in India and
in tariff rates between
8 percent in China. We could sell a lot more
industrialized and developing if we could see these barriers eliminated or
countries. We could sell a lot reduced substantially.�
SMMs are already reaping the benefits
more if we could see these
of trade agreements with Australia, Chile,
barriers eliminated Israel, Jordan and Morocco, and an agreement
or reduced substantially.Ó with the five Central American countries and
Dyke Messinger, president and CEO, Dominican Republic (CAFTA-DR) will go into
Power Curbers Inc. effect later in 2006. Bilateral negotiations
are underway with several other countries,
ing for about two-thirds of total U.S. exports including Thailand, Colombia, Ecuador, UAE,
of goods and services. But high tariffs and South African Customs Union, and several
other foreign trade barriers are limiting the more are under consideration, including
ability of U.S. manufacturers to sell their Egypt, Korea and Malaysia. In addition, the
products abroad. That�s why the negotiation U.S. government hopes to complete a global
of new trade agreements like the Doha Round trade liberalization agreement in the WTO
agreement in the World Trade Organization (the Doha Round) before trade negotiating
(WTO) and bilateral free trade agreements authority expires in 2007. So, SMMs can
(FTAs) like the recent U.S.-Australia accord look forward to even more sales opportuni-
are so important for SMMs. These agreements ties abroad in the next one to two years.
reduce tariffs, or in the case of FTAs, elimi-
nate most tariffs altogether. Addressing Other Challenges
Power Curbers Inc. is a North Carolina- In the Global Marketplace
based small manufacturer that sells its Overcoming tariff barriers in foreign mar-
construction-related machinery globally. kets is often a difficult challenge but there
President and CEO Dyke Messinger said his are others as well.
company exports to more than 70 countries Counterfeiting. In many developing mar-
around the world, including places as far away kets, particularly China, counterfeiting and
as Australia, China, Japan and Malaysia and other violations of intellectual property rights
places as close to home as Canada, Mexico (IPR) are a common problem. Companies
and Central America. More than one-fifth report counterfeiting and piracy of an
of our production was exported in 2004 and increasingly wide range of products�apparel,
our exports have doubled in the past three personal care products, auto and truck parts,
years. We have hired more employees over the medicines, industrial equipment, tools, DVDs
years to keep up with the increased exports. and computer software. U.S. companies
�There is huge imbalance in tariff rates have found counterfeits of their products sold
between industrialized and developing not only in the target foreign market, but
countries, however. U.S. and other industrial also in distant third-country markets so a
country-bound tariff rates on imports of comprehensive international strategy is
manufactured goods are now down to an often necessary. SMMs need to be proactive
average of about 3 percent, but the average in protecting their intellectual property
bound industrial duties in the developing rights, for example, by seeking professional
countries is over 17 percent�nearly six advice and registering their patents and
20The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
trademarks even before they enter foreign countries to the United States. So SMMs are
markets. The Department of Commerce, hurt on both the export and import side. In
U.S. Trade Representative�s Office and U.S. some sectors in China and other countries,
embassies have trained staff who can assist direct and indirect subsidies to local indus-
businesses in protecting their intellectual tries give additional unfair advantage over
property and seeking redress of IPR viola- foreign competitors.
tions. Also, the Department of Commerce is Domestic Impediments. SMMs can also
a member of the STOP! (Strategy Targeting encounter trade obstacles here in the United
Organized Piracy) Initiative to confront States. Companies that manufacture products
global piracy and counterfeiting, further that have dual military and civilian uses or
described in the Appendix. contain advanced technology with military
Non-Tariff Barriers. SMMs can also face applications may have to obtain an export
a variety of non-tariff barriers, including license from either the Department of
differing technical standards and regulatory Commerce or State Department to sell abroad.
requirements that may affect product label- Technology and products that might be used
ing and design. Conformity assessment in making nuclear, biological or chemical
procedures on products standards may differ weapons receive close scrutiny, particularly if
as well and require the use of local testing they are destined for China or other coun-
bodies rather than testing bodies commonly tries of concern. The licensing process can
used in the United States. Depending on be intrusive and time-consuming. Some
the product, SMMs may need to obtain pro- U.S. companies have complained that the
fessional advice on meeting technical and export licensing process is too cumbersome
regulatory requirements. and is more restrictive than needed to protect
China. For many SMMs, China presents legitimate national security interests.
special challenges. An increasing number
of SMMs are succeeding in the China market, Structural Cost Issues
particularly now that China has an official While low labor costs and undervalued cur-
policy of welcoming foreign investment and rencies in developing countries are a large
adhering to international trade rules adopted part of the competitive challenge faced by
by the WTO. Notwithstanding official policies, U.S. manufacturers, there are unavoidable
SMMs can experience a variety of difficult costs of doing business at home that also work
problems. Ineffective IPR protection, lack to undercut SMM competitiveness. In a report
of regulatory transparency, uneven admin- titled How Structural Costs Imposed on U.S.
istration of law and arbitrary application of Manufacturers Harm Workers and Threaten
taxes, notably the value-added tax (VAT), are Competitiveness,the NAM, The Manufacturing
frequently cited as trade obstacles. Institute and the Manufacturers Alliance/
Undervalued Currency. SMMs also must MAPI demonstrated that costs for energy�
overcome the hurdle of undervalued curren- particularly natural gas�health care, retire-
cies in some countries. In the case of the ment benefits, tort litigation, regulatory
China market, some economists estimate compliance and taxes add more than 22 per-
that its currency is about 40 percent below cent to U.S. manufacturers unit labor costs
its real market value against the U.S. dollar. relative to our major foreign competitors.
Currency undervaluation artificially raises Taken together, they offset a large part
prices on all U.S. exports to such countries of the 54 percent increase in U.S. manu-
and lowers prices on exports from these facturing productivity since 1990. What�s
21The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
more, a 2005 report on the same topic shows more energy. Yet, we are not producing
that some of these costs are responsible energy domestically and our reliance on
for an unprecedented 67 percent drop in foreign sources is growing.
manufacturing profits as shown in Chart 6. Manufacturers large and small alike face
(For a copy of these reports, go to this uncertain energy future because the
www.nam.org/costs). United States has allowed its energy infra-
These manufacturing costs are discussed structure to age while U.S. competitors are
below. While all manufacturers are adversely meeting their growing demand. Despite
affected, SMMs are often more affected extensive population growth and a much
because they have fewer financial resources larger economy, the United States has not
and cannot spread them over such large built a single oil refinery since 1976. While
product volume. Japan has 23 liquefied natural gas (LNG)
Energy Supply and Cost. Manufacturers terminals, the United States has only four.
account for one-third of the energy con- While France built 58 nuclear power plants
sumed in the United States, as shown in since the 1970s that supply 80 percent of
Chart 7. Even though the United States is a the countrys electricity, the United States
leading energy producer, energy production built one. Meanwhile, China plans to spend
is not keeping up with consumption and high $50 billion in the next 15 years to build 30
energy costs are becoming an obstacle to nuclear power plants.
U.S. competitiveness. Over the past decade A particular problem for manufacturers
our energy consumption has increased by over the past several years has been the rap-
more than 12 percent, while our domestic idly rising price of natural gas. Natural gas
production has increased by less than one- accounts for 40 percent of U.S. industrial
half of 1 percent. A growing economy needs energy consumption.
Chart 6. High Cost and Modest Pricing Power Have Cut Into Manufacturing ProÞtability
22The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
Chart 7. U.S. Manufacturers Use the Most Energy (Energy Consumption by Sector)
Unlike oil, which is considered a global materials from oil, gas has been the feed-
commodity, natural gas is produced and sold stock of choice in the United States. The
primarily in regional markets. Whereas the American Chemistry Council recently esti-
United States depends on foreign suppliers mated that restrictions on U.S. natural gas
for 58 percent of its oil, it provides 84 percentproduction and resulting high prices have
of its natural gas from domestic sources and contributed to the loss of $50 billion in
receives an additional 13 percent by pipeline chemical industry sales and the loss of
from Canada. 100,000 jobs. Of 120 chemical plants worth
The United States now has some of the $1 billion or more being built in the world
highest natural gas prices in the world� today, only one is being built in the United
double the prices in Japan and China and States. SMMs are suppliers to the U.S. chem-
far above the $1 per million British thermal ical industry and as that industry builds
units (MMBtu) in the Persian Gulf coun- capacity abroad and shutters facilities here,
tries. In August 2005, just before Hurricane many SMMs will lose their customer base.
Katrina hit, U.S. natural gas prices topped The plastics industry, which uses natural
$8/MMBtu. Then Katrina knocked out natu- gas not only for heat and energy but also as a
ral gas rigs and parts of the distribution feedstock, lost 150,000 jobs and $14.6 billion
network, driving prices up to $12/MMBtu in between 2000 and 2002. The fertilizer indus-
September with peaks as high as $14/MMBtu try, also heavily dependent on natural gas,
since then. has lost 36 percent of domestic capacity since
High prices have effectively wiped out 2002, and much of that will never return to
the American chemical industrys main the United States. SMMs that are not sup-
competitive edge. Whereas most overseas pliers to these industries feel an enormous
chemical plants derive most of their raw blow from runaway natural gas prices.
23The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
Fletcher Steele, president of Pine Hall development and production, and to promote
Brick Company, Inc., in Winston-Salem, N.C., further use of nuclear power and coal.
testified in November 2005 before the U.S. Employee Benefits. Compared to our
House Appropriations Subcommittee for trading partners, businesses in the United
Interior, Energy and Related Agencies con- States and particularly manufacturers
cerning the devastating effect of natural gas play a much bigger role in the financing of
prices on his company. Because of its con- health and retirement benefits. In many
venience and reliability, natural gas is by other countries, health care and retirement
far the most common fuel used in the brick benefits are funded in large part by govern-
industry, with 80 to 90 percent of kilns ments through general income taxes. More
using it for drying and firing brick. After than 90 percent of Americans under 65
being cut off from gas for five days following obtain their health insurance through their
Hurricane Rita in September 2005, Pine employers. The United States spends more
Hall Brick saw prices double, resulting in as a percentage of GDP on health care than
an unsustainable $700,000 monthly cost any other country 16 percent of GDP
increase. The company announced a sub- based on current estimates and health
stantial price increase as of early January care expenditures have outpaced inflation
2006 and expected some for years. Total health
homebuilders to use Pine Hall Brick Company care spending has
less brick and more saw [natural gas] prices reached $1.9 trillion
siding and other cheaper per year or an average
materials. Steele fore- double, resulting in of $6,280 for every
saw a sales slowdown in an unsustainable $700,000 man, woman or child.
January, when natural monthly cost increase. In addition to health
gas would be most insurance, most U.S.
expensive, and planned to suspend about manufacturers provide pension or retirement
half of production. With alternating work savings benefits for their employees. Manu-
crews, the company expected to spread the facturers both large and small historically
required layoffs among its 375 employees. have led the business community in providing
Although the demand for natural gas has pension benefits. Based on a recent NAM
exceeded domestic production capacity in survey of SMMs, more than 80 percent of
recent years, the United States actually has respondents said they provide defined con-
abundant reserves. The problem is that most tribution plans for employees and almost one-
of those reserves are in the Outer Continental third provide a defined benefit, or traditional
Shelf (OCS), where about 25 percent of U.S. plan. Some companies provide both.
natural gas is currently produced. Exploration Health Care Costs.While health plans are
of the OCS is opposed by environmental often a competitive strength for SMMs
groups and by coastal states that are concernedcompared to other businesses in attracting
about possibly hurting tourism. For more employees, their cost is becoming an increas-
information on the energy dilemma facing ing burden. In the 2005 NAM Small and
manufacturers, go to www.nam.org/energy. Medium Manufacturers Operating Survey
The NAM supports legislative initiatives and in an informal survey the NAM con-
to allow drilling for natural gas in the OCS, ducted among its SMM board members in
to open the Alaskan Arctic National Wildlife September 2005, the cost of health insurance
Refuge (ANWR) for oil and natural gas for employees was ranked as the most seri-
24The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
ous concern. Over the past several years, costs. I have long thought those benefiting
respondents to the annual survey have from health care coverage should buy into
indicated a steady increase in health care the responsibility for their own health,� said
expenses that shows no sign of letting up. Kendig Kneen, CEO of Al-jon, Inc., a manu-
If health care costs continue to increase facturer of car crushers, landfill compactors
along current trends, the great majority of and scrap metal balers based in Ottumwa, Iowa.
respondents to the 2005 NAM Small and Starting in 1996, Al-jon required employees
Medium Manufacturers Operating Survey to bear a large part of the increase in annual
(69 percent) plan to increase employees share health care expenses, but the amounts they
of coverage costs, while a smaller number were required to pay began to grow ominously.
(19 percent) will consider changing to a Then, fortunately, the local hospital began
defined-contribution approach. Defined- to offer a program called Healthy Choice in
contribution approaches include Health which participants are tested and evaluated
Savings Accounts (HSAs) and Health Reim- and, if appropriate, agree to health improve-
bursement Arrangements (HRAs). They are ment goals. Al-jon pays 25 percent of health
both ways an employer can limit its health insurance premiums for employees who go
care expenditures to a set amount and then through the screening, 50 percent for those
encourage workers to manage their expenses who work toward defined goals and achieve
around that amount. Among the survey res- them, and 75 percent for those considered
pondents, the most important new employee well by the hospital. The health care indus-
benefit initiative was starting new HSAs, with try tells you that every dollar in prevention
20 percent indicating their intention to do so.comes back to you fourfold,� Kneen noted.
Leading SMMs are exploring a variety of Vermeer Manufacturing Company, also
approaches to deal with rising health care from Iowa, has self-insured health care
Table 1. SMM Health Care Expenses as a Percentage of Sales
(percentage of respondents for each category)
Fiscal Year 2003 2004
Less than 2 percent 3.3 6.4
2-5 percent 23.4 22.8
6-8 percent 27.1 26.1
9-10 percent 17.0 12.5
More than 10 percent 26.7 31.4
No Response 2.5 1.0
Table 2. SMMsÕ Increase in Health Care Expenses Over the Prior Year
(percentage of respondents for each category)
Fiscal Year 2002 2003 2004
More than 10 percent 87.9 80.9 70.4
More than 20 percent 39.9 27.7 17.6
More than 30 percent 16.6 8.6 4.7
25The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
expenses for the past 15 years and began to allowances that they could use for HSAs or
offer HSAs in 2005. The companys plan optional coverage programs.
includes employee co-payments for health Tort Litigation Costs. To an increasing
insurance premiums and services. When degree, manufacturers in the United States
they have to pay something themselves, they are exposed to the cost of actual or threatened
are going to be better health care users,� litigation. The NAM/MAPI Structural Costs
said co-CEO Mary Andringa, daughter of study noted that the U.S. tort system is
founder Gary Vermeer. The company also notorious for its high cost, its inefficiency
maintains a small health clinic on its Iowa in compensating plaintiffs who have suf-
campus that does routine tests, provides fered losses and its inability to link damage
health care counseling and conducts physi- awards to demonstrably negligent behavior.
cals for employees children. For minor In todays competitive price environment,
health care issues, having the clinic on-site
is a time saver. And as of January 1, 2003, ÒI have long thought
Vermeers entire campus went smoke-free.
those beneÞting from health
Health care expenses have increased 20
care coverage should
percent per year over the past five years for
The Bilco Company, a manufacturer of buy into the responsibility
specialty access doors based in New Haven, for their own health.Ó
Conn., according to Roger Joyce, vice presi-
Kendig Kneen, CEO, Al-jon, Inc.
dent of engineering. Management discusses
this problem openly and shares the numbers it is difficult to pass those costs on to con-
5
with employees and the Ironworkers Union to sumers, so most of them are borne by U.S.
which they belong. Together they work out manufacturers, creating one more disad-
the types of programs offered to employees, vantage for them compared to their overseas
the level of employee cost-sharing, and how competitors. Tort costs as a percentage of
employees can minimize their costs while GDP are twice as high for the United States
tailoring programs to suit their particular as for its principal trading partners except
family needs. Because every program has a for Germany.
certain degree of employee participation, Asbestos litigation has been particularly
employees and management are in effect visible. To date, more than 8,400 companies
partners looking for a solution. There is not have been named as defendants in asbestos
very much resistance from employees, said cases, more than 70 companies have filed for
Joyce, because management discusses the bankruptcy protection�about one-third of
6
issues with them openly. them SMMs �and more than 60,000 jobs
Employees also bear a share of their have been lost. Many of the lawsuits have
health insurance premiums at Al Lubrano�s been filed by plaintiffs who show no symp-
Technical Materials, Inc. He believes the toms of asbestos-related disease.
ultimate solution for American businesses Frivolous lawsuits can be particularly
will have to be some sort of high-deductible costly in relative terms for SMMs that dont
catastrophic insurance and perhaps an have in-house legal staffs and have to hire
annual physical provided by the employer outside lawyers. In personal injury cases,
with other options such as prescription plans settlements can be the only alternative to far
available for a fee. Lubrano believes a relatedmost costly lawsuits and damage awards,
approach could be to provide employees with but they become a form of extortion.
26The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
Premiums for product liability insurance compliance costs have been particularly
are generally scaled in proportion to sales notable in consumer and workplace safety,
dollars, noted Al-jon�s Kneen, but where and environmental protection (see Chart 8).
small manufacturers have a real disadvantage In a 2005 study for the Office of Advocacy,
in relative terms is in the cost of defense in Small Business Administration, The Impact
7
lawsuits. He noted an example of a customers of Regulatory Costs on Small Firms,W. Mark
employee who broke a leg when an engine Crain estimated that the total cost of com-
block being carried by an Al-jon loader plying with federal economic, workplace,
dropped while he stood nearby. The employee environmental and tax compliance regula-
should not have stood there, but he still sued tions was $1,113 billion in 2004, with a
Al-jon for $250,000. Even though the $648 billion portion of that cost borne by
company did nothing wrong, it settled for businesses. It is significant that the authors
$100,000 to protect against legal expenses found that these costs for manufacturers
and an ultimate damage award that could had increased substantially since his earlier
have totaled three times that amount. report in 2001. In fact, the gap between
Regulatory Compliance Costs. In the manufacturing and non-manufacturing has
NAM/MAPI Structural Costs study, regulatory grown significantly in these years. The cost
compliance costs were described as the gap between large and small manufacturers
�silent killer of manufacturing competi- has also increased.
tiveness. Regulations are often developed As shown in the tables on page 28, Crain
without an objective cost-benefit analysis and found that the cost burden of complying with
they have steadily increased in quantity and these regulations falls disproportionately
complexity regardless of the political party on small businesses in all sectors of the
in control of the White House. Increases in economy, and he found that the regulatory
Chart 8. Manufacturers Hit Disproportionately Hard by Federal Regulations
27The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
cost burden is proportionately even greater realize. Rather than spending our valuable
for small manufacturers than for small firms R&D budgets for new product development
in other sectors such as trade, services and that results in revenue growth, we have had
health care. In 2000, the cost of regulation to spend it on regulatory compliance.�
for manufacturers was 67 percent higher than Taxes. U.S. manufacturers also face higher
for all types of businesses. By 2004, the tax rates on their business income than many
regulatory costs for manufacturers were 81 of their competitors overseas. The current
percent higher. top U.S. tax rates�combined federal and
For Al-jon and other manufacturers, diesel state�are much higher than the average
engines must be Tier II or Tier III compliant. 29.2 percent corporate tax rate in other OECD
Soon they will need to be Tier IV compliant. countries. This is true despite the recent tax
This classification reflects varying degrees relief enacted in the United States. Moreover,
of decreased emissions, ending at Tier IV some of the recent rate relief for SMMs
where the air that comes out of the diesel organized as S-corporations is temporary and,
engine�s exhaust system is actually cleaner absent federal legislation, will expire in 2011.
than the air that enters the engine. CEO Another temporary measure that benefits
Kneen says, While we all can recognize the SMMs is repeal of the estate or death tax.
benefits of this system, it does not come Legislation enacted in 2001 gradually phases
without great cost to manufacturers who must out the estate tax until 2010, when the tax will
redesign their cooling systems to handle be completely repealed. Unfortunately, the
the increased heat that is generated by the tax law changes are only temporary. A sunset�
hotter burn chamber that accomplishes provision terminates all the tax relief at the
the cleaner exhaust. For Al-jon, with 105 end of 2010. Unless the sunset is repealed,
employees, that cost has run well above a the 2001 estate tax regime will resurface in
six-figure number. The costs of regulatory 2011. The temporary nature of the phaseout
implementation have a snowball effect creates significant complexity, confusion, and
throughout our economy that most fail to estate planning cost for SMMs. According
Table 3. 2004 Business Regulatory Costs in Small, Medium and Large Firms
(cost per employee in 2004 dollars)
Firm Size (Number of Employees)
All Firms < 20 20-499 500+
All U.S. Businesses $5,633 $7,647 $5,411 $5,282
Manufacturing $10,175 $21,919 $10,042 $8,748
Table 4. 2000 Business Regulatory Costs in Small, Medium and Large Firms
(cost per employee in 2000 dollars)
Firm Size (Number of Employees)
All Firms < 20 20-499 500+
All U.S. Businesses $4,722 $6,975 $4,319 $4,463
Manufacturing $7,904 $16,920 $7,454 $7,059
TablesÕ Source:W. Mark Crain, ÒThe Impact of Regulatory Costs on Small Firms,Ó 2004.
28The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
to the 2005 NAM Small and Medium Manufac- manufacturing community will need to fill
turers Operating Survey,SMMs spend an over the next few years. Between 2002 and
average of $32,000 annually on estate tax 2012, the Labor Department has projected
planning, with 10 percent reporting annual 2 million job openings in computer science,
expenses of more than $100,000. mathematics, engineering and physical sci-
ences; and 2.4 million skilled production
Skill Shortages and Educational jobs available for machinists, machine
DeÞciencies assemblers and operators and technicians.
In the NAM/Manufacturing Institute/Deloitte Yet these job openings will not be easy to fill,
2005 Skills Gap Report,manufacturers given the findings of the 2005 Skills Gap Report
responded that having a high-performance and the problems we face with aligning
workforce is the most important driver of educational priorities with business�s
future business success for the next three workforce needs.
years. The study also shows a broadening gap In response to a recent survey by the
between the availability of skilled workers Census Bureau, 20 percent of American
and the employee-performance requirements companies said their workers needed to run
of modern manufacturing. These skill their new technologically enhanced facilities.
shortages are affecting manufacturers abil- While there continue to be unemployed
ities to maintain production levels to meet people in the United States, there is a scarce
customer demand, achieve productivity tar- supply of people with the skills manufacturers
gets and achieve or maintain target levels of need in the 21st century working environ-
customer satisfaction (see Chart 9). ment. The problem is not one of bodies, but
Employment projections by the Depart- rather of appropriate skills. While low-skilled,
ment of Labor indicate the types of jobs the labor-intensive jobs often move offshore,
Chart 9. The Most Important Factors to Future Business Success (2004-2007)
29The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
many jobs remain in this country that are work-specific skills, employers were also
rewarding and offer opportunities for career concerned with basic employability skills,
development. However, those high-skill jobs such as attendance, timeliness and work
require more than just a high school educa- ethic, as well as reading, writing and com-
tion�they demand the education and skills munication skills.
acquired through post-secondary education. The causes of the current skill shortage
Most of todays jobs on the factory floor arent stand alone�� each factor is inter-
require some analytical and reasoning twined with others:
skills, for example. Basic Education Deficiencies. Countless
Thirty years ago, less than half of manu- manufacturers who screen applicants to fill
facturing workers had a high school degree entry-level positions are finding that high
and less than 10 percent had an associate, school graduates lack the reading, writing and
bachelor, or engineering degree. By 2001, mathematical skills that should be expected,
80 percent of factory workers had a high and many of them enter the workforce
school degree and 30 percent had post-second- without basic employability skills as well.
ary education. If current trends continue, Companies often have to provide employees
more than 80 percent of factory jobs will with remedial education before they start
require post-secondary education by 2012. job-specific training, and this can be a cost
The growing talent shortage is evident burden for an SMM.
beyond the need for more higher-skilled Vocational Training. In recent decades,
entry-level workers. To remain the worlds as industrial employment shifted and
leading innovator, the United States will demand for vocational education shrank in
need a more robust supply of scientists regions across the country, community col-
and engineers. leges provided less training in factory skills
In the 2005 Skills Gap Report,81 percent of such as machining and welding or did not
respondents said they are currently facing a upgrade their training to the more sophis-
moderate to severe shortage of qualified ticated technical skills now needed in manu-
workers. Most severe are shortages pertaining facturing. At the same time, relatively few
to the higher skill levels. Ninety percent of manufacturers engaged in substantial
respondents indicated a moderate to severe interaction with state or local workforce
shortage of qualified, skilled production systems, which left providers in the dark
employees and 65 percent (74 percent of about how manufacturing �and the skills
respondents with more than 500 employees) required to work in it � was changing. Often
reported moderate to severe shortages of not known by large and small manufacturers
scientists and engineers. Thirty-nine per- alike are the provisions of the Workforce
cent also indicated a current shortage of Investment Act (WIA) of 1998. The WIA
unskilled production employees. provides federal job training aid (grant
Respondents were asked what types of monies) and requires state governors to
skills they needed in their employees over appoint Workforce Investment Boards
the next several years. Technical skills were (WIBs). The majority of seats on these WIBs
most important, mentioned by more than half, and their chairs are to come directly from
followed by the ability to work in teams, strongthe business community.
computer skills, the ability to read diagrams Thus, by participating, SMMs can get more
and translate flow charts, and strong super- directly involved with education and training
visory and managerial skills. Along with these activities in their local areas. And by working
30The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
with elementary and high schools, commu- middle-school students are taught math by
nity colleges, public training programs and teachers with neither a major nor a certifi-
9
providing internships and externships for cation in that subject.
students and teachers, manufacturers can Inadequate and perhaps uninspiring
help define curricula, increase awareness secondary education is part of the reason
of their job and career opportunities, and young Americans interest in science and
enhance the public perception and overall technology has eroded over time. In 2001,
knowledge of manufacturing and manufac- only 8 percent of college degrees awarded
turing careers. in the United States were in engineering,
Math, Science and Engineering Edu- mathematics or the physical sciences, rep-
cation. Not enough Americans are pursuing resenting a 50-percent decline since 1960.
physical science and engineering courses As chart 10 shows, between 1985 and 2000,
at the college and graduate school level� the number of engineering graduates per
particularly when compared to trading part- year declined 20 percent to 59,500 in the
ners and competitors like China, Japan and Unites States while that number increased
Korea. The problem starts with the quality by 160 percent to 207,500 in China. Japan
of teaching at the secondary level. In a 1995 graduates more engineers than the United
10
study, fourth graders in the United States States does and soon Korea will as well.
ranked 12th against other nations in math- While fewer American undergraduates
ematics competency and eighth graders are studying math, science and engineer-
ranked 19th; in science, fourth graders ing, graduate programs in those fields are
8
ranked 6th and eighth graders 18th. Part of enrolling an increasing proportion of foreign
the problem stems from teacher qualifica- students�46 percent in 2001 compared to
11
tions. Another study found that 70 percent of 28 percent two decades earlier. Those stu-
Chart 10. United States Falling Behind in Engineering
31The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
dents have benefited the U.S. economy, as the aspirations of todays workers. The best-
historically about half have stayed to work qualified employees are looking for much
here at least for a few years. Recently, how- more than a paycheck. They are looking for
ever, other countries have begun to create autonomy, involvement in decision-making,
employment and research opportunities for and transferable skills and experiences that
science and engineering degree holders, will make them valuable to the market at
allowing them to pursue their careers out- large as well as to their current employers.
side the United States. Furthermore, tighter They are more loyal to their careers than to
security requirements since 9/11 have led to their employers.
fewer visa applications and a decline in the These problems will continue to chal-
number of student and high-skilled foreign lenge SMMs. The baby boom generation,
nationals entering the country. As a result born right after World War II, is beginning
of these trends and a doubling of the global to retire. The NAM estimates that baby
workforce, the United States will have a shrink-boomer retirements will peak in 2012 and
ing foreign talent pool to fill its growing math,there will be 10 million unfilled positions
science and engineering shortages. by 2020.
Manufacturing Career Image. Manufac- Employee turnover is close to zero at The
turing as a career has had cultural and per- Bilco Company in Connecticut, a leading
ception problems in recent years, holding manufacturer of roof access scuttles, steel
back many younger workers from entertaining
the sector as a likely employment choice. Finding qualiÞed workers has
Negative images remain, and some people become steadily more difÞcult in
still consider manufacturing jobs to be low-
paying and dirty. Public perception is still the 26 years Roger Joyce has
catching up with the way manufacturing has worked with The Bilco Company.
been revolutionized by a combination of basement, sidewalk, and access doors. Most
technology and enlightened management employees who leave do so at the companys
philosophies, including flatter organizational request, according to Roger Joyce, the vice
structures, more delegation and empower- president of engineering. Bilco pays better
ment, and the blurring of lines between blue than most manufacturers, offers very good
collar and white collar jobs. The challenge benefits and, as a family-owned company,
before manufacturers is how to broadly treats everyone like family.
communicate information about modern Finding qualified workers has become
manufacturing and the satisfying careers it steadily more difficult in the 26 years Joyce
has to offer. The Manufacturing Institute�s has worked with Bilco. There was more
Dream It. Do It. Manufacturing Careers manufacturing in the central Connecticut
Campaign is a step forward in helping improve region a generation ago. Now there is less
the public perception of manufacturing. emphasis on skills such as welding and tool
Corporate Culture and Leadership. To and die manufacturing and those subjects are
attract and retain qualified employees at all covered less in high school and community
levels and to establish a high-performance college curricula. So decades ago, Bilco rec-
workplace, the management of an SMM has ognized that it would not be able to find
to evolve with the times, continually devel- qualified welders on the street and embarked
oping new leadership skills and striving to on its own internal training programs. Now
develop a corporate culture that nurtures the company trains welders for many months
32The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
at its own cost because it has no other Often they pay more attention to SMMs than
choice. In screening new recruits, Bilco the largest banks do.
looks for people who are trainable. If you Diamond Metal Casting finances its
want to learn and work hard, there is growth with a combination of internally
opportunity for advancement,� said Joyce. generated funds and bank borrowing. Jerry
The basic educational qualifications of Letendre, the companys president, said
todays high school graduates are not what economic cycles affect credit availability
Joyce would expect. He noted that 53 per- and banks have much tighter credit stan-
cent of high school graduates in dards than they used to have. During the
Connecticut who go on to community col- 2001-2003 recession, the company went
leges need remediation to teach them what into a survival mode. It limited capital
they should have learned in high school. investment to an amount well within cash
flow from operations and tried to reduce
Bank Credit Policies and bank debt, which seemed onerous at the
Interest Rates time. Today, when Diamond Metal Casting
Willingness of commercial banks to lend wants to borrow, it can take advantage of a
to SMMs tends to be somewhat cyclical 26-year relationship with its principal bank.
depending on economic conditions and the �We have a good track record,� said Letendre.
banks own balance sheets. Interest rates �The bank knows our staying power.�
are cyclical as well, depending on Federal Al-jon�s Kneen said, More and more
Reserve monetary policies. today, the world is composed of box bankers�.
Some companies noticed a contraction Either your company fits into the box for the
in bank lending during the 2001-2003 purpose of credit approval or it doesnt.
recession. Credit conditions for SMMs have Large banks are sometimes unwilling to
been relatively good in the past several years take the time to understand your business
because of low interest rates, a healthy and to take the credit risk that could lead
economy and competition among banks to to a growing and profitable relationship.�
put loans on the books. Community banks Kneen now prefers to deal with community
have become more aggressive in lending to banks that have a business focus, many of
small manufacturing and service companies. them privately held.
33The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
Internal Management Challenges
MMs, like most businesses, are under differentiate the company and set it apart
S constant pressure to cut costs, improve from competitors.
quality, and go to the market with new, An effective strategic plan is the pathway
improved products to stay competitive in to creating value. It focuses on the scope of
the global marketplace. At the same time, the company, including its product, geographic
personnel and financial resources may be and vertical boundaries, and emphasizes how
stretched thin and not every business priority the firm manages its activities. Whereas
can be addressed at the same time. The owner strategic planning is sometimes considered
or CEO of a small manufacturing enterprise only necessary for large, diversified compa-
is nimble, able to make quick decisions and nies, it is important for organizations of all
ready to accept the entrepreneurial challenge sizes, including SMMs, to gather and analyze
that comes with the territory. information and to make decisions about the
Managements of small companies are range of markets in which they will compete
sometimes so busy with the nuts and bolts of and how they will implement the marketing,
day-to-day operations that they have little production, financial and human resource
time to think about what is happening in the strategies to reach their goals.
business world, in the economy at large, Hialeah Metal Spinning makes round
in Washington,� said Karla Aaron, CEO of and hollow metal parts. The strategic
15-employee Hialeah Metal Spinning in planning process identified our niche,�
Hialeah, Fla. Everything happens to them. explained Aaron. We determined we were
They need to be more proactive and to feel not producing a commodity but selling a
they have a voice. Often a company must process. The companys end products are
grow to 100 or more employees before it has designed by its customers and a customer
a staff��someone available to attend a typically uses two or three spinnings, i.e.,
meeting, to spend some time researching orders two or three metal parts. The com-
what is happening, or to write a letter to a pany has a diversified customer base from
congressman or trade association.� the electronics, lighting, appliance, marine,
Strategic Planning cookware, medical and cryogenic industries.
I have not lost work to China or Mexico
Strategic planning is the process a company
uses to evaluate market opportunities, ÒManagements of small
determine its competitive position, select companies are sometimes so
appropriate marketing channels, develop
business product strategies, and prepare busy with the nuts and bolts of
the business and tactical plans necessary day-to-day operations that they
to be successful in the marketplace. Good
strategic planning and the effective imple- have little time to think about
mentation of plans facilitate growth and is what is happening in the
often a key factor in the companys success. business world, in the economy
For the SMM, it is the process of having a
disciplined approach to thinking strategi- at large, in Washington.Ó
cally about the organization and how to Karla Aaron, CEO, Hialeah Metal Spinning
34The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
because our products are the ones the cus- Most senior people at
tomer has to have, on time, and it�s more
hassle to retool and move production to Technical Materials have an
another manufacturer than to pay our prices. engineering background.
There are high exit costs and that partly The vice president of marketing
explains why our industry is not very price has a graduate degree in
sensitive. When companies are trying to pare
down their suppliers, we are generally spared. metalurgy from MIT, and would
If you are spending just $5,000, it doesnt have difÞculty talking to the
make sense to go overseas, she said. companyÕs customers if he did
Technology not have that background.
What most often differentiates an SMM in
todays global economy is the use of tech- Limited budgets, lack of in-house expertise,
nology and high-skilled workers to make a and lack of access to the newest technologies
product that no other company can match. are but a few of the barriers faced by small
In particular, SMMs in the United States manufacturers, according to the National
need to focus on higher-end, higher-margin Institute for Standards & Technology Manu-
products where proprietary technologies, facturing Extension Partnership (NIST-MEP),
responsive customer service, speed and a partnership of the private sector and state
convenience are more important than cheap and local governments that offers technical
mass production. Despite recent efforts by and business assistance to SMMs through
China and India to train scientists and 60 nationwide non-profit MEP centers and
managers and move up the value chain, the 2,000 manufacturing and business specialists.
United States is still the worlds leader in Nonetheless, SMMs appear to have made
innovation and technology. significant progress over the past five years
Over the years, Technical Materials has in their use of the Internet, as well as
developed expertise in specialty metals that CAD/CAM, robotics and nanotechnology.
cannot be duplicated anywhere else in the Internet usage and broadband connections
world. Customer needs drive the product have become so widespread for SMMs
development process. While producing that the MEP centers no longer consider a
standard products, the company also par- training program in this area to be necessary.
ticipates in joint development efforts with Even the smallest manufacturers generally
customers that have special requirements, have Web sites and they can easily find the
as it did recently with a company that needs resources for developing and maintaining
very specific clad metal properties in the diskthem. In many cases, their Web sites are used
drive suspensions it manufactures. Most primarily for information and selling is still
senior people at Technical Materials have an done primarily on a personal basis. The
engineering background. The vice presi- potential for online, business-to-business
dent of marketing has a graduate degree in transactions was overestimated during the
metalurgy from MIT, and would have diffi- technology bubble of the late 1990s.
culty talking to the companys customers if Another step forward over the past five
he did not have that background. years has been in software availability. Vendors
Keeping abreast and investing in new are tailoring manufacturing, accounting,
technology can be a challenge for an SMM. and enterprise resource planning (ERP)
35The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues
software more and more to the needs of Quality issues have become increasingly
small manufacturers. Some SMMs are find- important for SMMs. In business-to-business
i