Small Scale Manufacturing: How to stay competitive in today's global economy

[dblanchard]

Two weeks ago, the economic outlook for small- and medium-size manufacturers in the United States looked problematical. The latest China-U.S. trade talks ended with little progress on the key issue of the undervalued Yuan, and slow economic growth had led to a decrease in optimism among manufacturing executives. The Chinese currency, which is expected to be kept intentionally undervalued, creates an immense competitive advantage for Chinese manufacturers, which perhaps feeds the pessimism among industry leaders in this country.

Professor Peter Morici, who teaches at the Robert H. Smith School of Business at the University of Maryland, explains: “China’s undervalued Yuan provides a 24 percent subsidy to exports, as measured by Beijing’s purchases of dollars and other currencies in foreign exchange markets to maintain an undervalued Yuan.” This mercantile policy, coupled with cheap Asian labor, lowers costs because of less stringent environmental regulations, and explicit government subsidies gravely challenges the future feasibility of U.S. manufacturing.

On the other hand, there have also been some promising signs. According to the Institute of Supply Management’s (ISM) monthly report, manufacturing growth accelerated in May for the fourth consecutive month. The Purchasing Manager Index reached 55 percent, its highest level in the past 12 months. A PMI above 50 percent means that the manufacturing sector is growing and expanding.

So what can small- and medium-size U.S. manufacturers do to remain competitive and keep the manufacturing sector growing?

They should focus on what U.S. companies excel at — namely innovation and high productivity. In the past, manufacturing companies have confronted the surge in Asian competition by cutting jobs. But after decades of downsizing, labor now accounts for only a small fraction of total manufacturing costs. Thus, companies must now look at new and innovative ways to improve their processes, their workers’ productivity, and, ultimately, their overall equipment effectiveness. But in order to improve their manufacturing operations, manufacturing executives must first have a clear picture of what goes on in the plant floor. And it is in this area that small- and medium-size manufacturers are falling behind.

While large U.S. manufacturers responded to the sharp rise in global competition by making large capital investments in the best and latest monitoring and lean manufacturing systems, small- and medium-size manufacturers weren’t able to keep up. Some of these manufacturers did not have the available human or capital resources to invest in new technologies, especially at a time when increased competition caused prices to fall. Others simply did not believe that they would see appropriate returns for their investment.

However, this reluctance may be disappearing. Executives at these smaller manufacturing facilities are starting to see the value of real-time data monitoring and analysis, and how it can help them run a leaner and more productive plant. Small manufacturers spread their overhead costs among fewer units and are likely to have capacity constraints. Therefore, they have to be constantly working to reduce costs and increase their productivity. This means tracking the production processes in real time, fixing bottlenecks, reducing waste, and addressing problems immediately to avoid downtime. New data-monitoring systems can help small manufacturers achieve these goals with their existing infrastructure and resources.

Pittsburgh-based INTEG Process Group developed its OMS data-monitoring system with these goals in mind. Adam Green, vice president of business development, spent several months analyzing small manufacturers so as to understand the challenges they faced.

“We talked to many manufacturers and heard the same things over and over again – it is too complicated, too expensive, and it won’t work with my machines. So we went back to the drawing board and developed something that dealt with each of those issues.”

It seems that many small manufacturers are embracing INTEG’s OMS and other manufacturing operations’ technologies. Phaedra Hise, author and contributor to Fortune Small Business, Forbes ASAP, and other publications, recently noted: “The best small American manufacturers are finding ways to compete on a global scale. They are applying creative tweaks to their manufacturing processes, improving efficiency and lowering production costs. They’re relying on theories and technologies that were once the exclusive province of multinationals.”

Whether or not this trend will spread across the industry is yet to be seen. But one thing is clear – with China experiencing tremendous growth in its manufacturing sector, small- and medium-sized U.S. companies cannot afford to sit idle and waste time.

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David Blanchard is an MBA student at the Tepper School of Business, Carnegie Mellon University in Pittsburgh.