Can IT save U.S. manufacturing?
Product innovation and reduced cycle times versus a flood of goods from China
By Kevin Parker, editorial director -- Manufacturing Business Technology, 12/1/2003 12:00:00 AM
Since the 1970s, when Germany and Japan found success in world markets as makers of high-quality goods, it's been said the U.S. was fading as a manufacturing power.
Yet today, 15 million people in the U.S. are employed in manufacturing, as was the case 20 years ago. And manufacturing furnishes 16 percent of total U.S. productivity, just as it did 20 years ago.
Granted, those 20 years have been ones of gut-wrenching change, as high-tech replaced rust belt, and companies learned to be flexible enough to serve increasingly sophisticated product markets.
But those challenges seem to fade in comparison with what's happening now, as U.S. manufacturers find already-squeezed profit margins further constrained by a flood of imports from China that will soon top $123 billion annually.
A recent article in The Wall Street Journal suggested that "the most vulnerable producers are makers of apparel, toys, and furniture, which tend to be high-volume, labor-intensive products that don't require huge outlays for research and development." But what's happening extends to other industries as well.
Curt Brown, CFO with Akron, Ohio-based Steere Enterprises, a plastics molder to the automotive industry, says his company faces severe margin pressures competing against low-cost imports from China.
"Customers say point-blank: cut prices or lose the business," maintains Brown.
Once more into the breach
In a time when investment capital moves all over the world looking for transient cost advantages, such that once-favored Mexico and Ireland have quickly lost their luster, sound strategies for pugnacious U.S. firms must include the following:
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Product innovation as a means of differentiation from low-cost commodity goods;
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Lean manufacturing to control costs and quality, and to achieve cycle and delivery times that can't be matched from overseas; and
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Selected overseas production based on a careful examination of products, markets, and costs.
IT is a big part of this strategy—whether product life-cycle management (PLM) for driving innovation; ERP for managing a manufacturing system; or electronic connectivity for far-flung operations. Used correctly, these business applications increase productivity and lower costs.
But can IT make the difference, allowing high-wage regions to compete effectively against low-cost regions?
The truth is, in and of itself, even the best use of IT is probably not enough to make the difference.
"If the cost differential were only 10 percent or 20 percent, then IT-driven productivity gains might be able to close that gap," says Erik Keller, a principal with Wapiti LLC, an independent consulting firm based in Connecticut. "But we're talking about labor, energy, regulatory, and taxation costs that combine for a cost differential of 50 percent to 60 percent. That's a huge difference. Basically, anything you buy at Wal-Mart can probably be made more cheaply in China than it can in the U.S."
Still, much remains to be seen. International transportation and shipping costs, for example, have been rising precipitously. Over time, things tend to even out. But manufacturers can't just sit and wait for them to do so. Perhaps it's time to think of IT not just as an enabler of cost cuts, but as a platform for the kind of creativity that grows revenues.
Barry Heller, executive VP with Technimark, Asheboro, N.C., one of North America's largest plastics molders, says his company is competing against imports from China and elsewhere, and has the strategies in place to prove it.
Technimark has shifted markets, introduced new products, and honed its use of plastics molding technology and automation. It has adopted a so-called triad plan for positioning productive capacity in diverse global regions based on several factors.
"Without question, we are competing with China across the entire range of plastics molding technology," says Heller. "It's not just the simple things. It includes very complicated parts and packaging."
Heller says IT's biggest benefit is that it allows Technimark to execute business and manufacturing processes anywhere in the world. One aspect of this is its use of an enterprise system for plastics manufacturers from IQMS. Technimark runs the system on a single Oracle database for all its locations.
Terry Cline, an IQMS company VP, says Technimark has taken advantage not only of the opportunity to have a single instance of the system for worldwide operations, but also of the real-time, integrated quality and native EDI capabilities of its system, all of which enhance the manufacturer's competitiveness.
Product innovation
One of the more striking statistics revealed in a recently released Deloitte survey report of more than 600 manufacturers, titled Mastering Complexity in Global Manufacturing, is that new products introduced within the last three years will generate 29 percent of manufacturers' total revenue in 2003—up from 21 percent in 1998—and that by 2006 manufacturers expect that figure to rise to 35 percent.
Says Keller, "It used to take five years before a new electronics product category attained mass-market pricing. Yet with DVDs, for example, some Chinese companies in this market have risen to the top very quickly."
Technimark's approach to product innovation "has been much influenced by our involvement in the cosmetics industry," says Heller. "Changing fashions drive cosmetics. That requires product innovation both in design and engineering. When we looked at the competitive landscape across the entire plastics industry, we took what we'd learned from cosmetics and applied it elsewhere."
It's also important to keep in mind, says Heller, where Chinese manufacturers are most likely to be competitive. For that reason, Technimark moved into thin-wall rigid packaging used for CDs and other products.
Be quick about it
Another way to get the jump on goods from China is to deliver product quicker than anyone else.
"We spend more time on parts design, production-flow analysis, and developing efficient automation—as well as looking at alternative parts-forming technologies," says Heller. "It's one thing to mold parts. It's another to produce high-cavitation molds with very quick cycle times. Molding technology at times can outpace automation advances, and automation has to keep up for there to be real gains."
Of course, U.S. manufacturers themselves produce goods overseas, either importing into the U.S. or for foreign regional markets. There, emerging consumer classes busily honing their shopping skills deliver profit margins to American companies much larger than they could ever hope to attain here at home—e.g., thousands instead of hundreds of dollars per automobile sold.
The Deloitte survey found that 80 percent of the companies surveyed sell outside their region, 53 percent have shifted production, and 59 percent have shifted some engineering to low labor-cost regions.
U.S. manufacturers have moved overseas, says the report, in reaction to the tremendous pressures on profit margins already mentioned, which on the buy side are seen emanating from ever-larger mega-retailers and OEMs.
Divvying up production capacity across high, moderate, and low labor-cost regions is sometimes referred to as a "triad" approach, but Heller says he calls it "having different size hammers in the company tool box."
When plastics makers introduce a new product, he says, "You start with a test market—building limited quantities using two- to four-cavity molds and with simple manual assembly. It's efficient use of capital to do that in China. When the market begins growing and you want better than six-week delivery and increased dependability, you can build that same part in Mexico with a one-week lead time. Now you're using more automated, four- to eight-cavity molds. Once the product really takes off, you might want to bring its manufacture back to the U.S., where with 16- to 32-cavity molds and plenty of automation you can enjoy the consistent quality that comes with the high-cavitation system and the very shortest lead times."
Where IT impact lies
IT is said to make work more productive by eliminating duplication of effort and automating flexibility. IT must increase the output per unit of work to have an impact on costs and competitiveness.
Yet Heller and others often speak of IT benefits difficult to measure as output of a unit of work. "Where I see IT having the biggest impact," he says, "is in ensuring that you can run the same parts in different plants anywhere in the world. To be an international supplier, you have to be able to do that."
The notion that information technology helps companies grow revenues, or that it can make a qualitative—as opposed to a quantitative—difference is an intriguing one. It's one of the intangibles that make projections about the future course of American manufacturing so difficult.
Some things do seem settled though. Says Dave Caruso, a VP with Boston-based AMR Research, "U.S. manufacturers will need to move up the food chain to be systems providers. The Chinese will have a tremendous capability at the component level of products. A good part of the needed restructuring of U.S. manufacturing was done in competition with Japan. More at risk are countries like Mexico."
But no matter how good a job business process engineering supported by IT does in helping American manufacturers, it doesn't mean U.S. manufacturing employment will grow again. Despite the 21st century's slowed economy to date, the rate of U.S. productivity growth has increased—an unusual occurrence under such conditions. Automation and IT providers don't like to talk about using technology to reduce head counts, but it would be hard to ignore its role in the present jobless recovery.
