Throw ill-advised caution to the wind

Manufacturing is the machine that powered America's global economic leadership over the past century. Manufacturing has been a source of shareholder value and job creation—not to mention the starting point for enduring corporate legacies.

Yet a tough economy and a perceived threat of overseas competition has caused great concern for U.S. manufacturing's future. But there's good news in the numbers and—given increased attention to innovation and the needs of global markets—there's reason for optimism going forward.

According to research from MIT's Industrial Performance Center, durable goods sales in the U.S. have doubled since 1990, and now account for 22 percent of all purchases, compared with nearly 16 percent in 1990. Total U.S. manufacturing output increased 35 percent during the same period.

Productivity has soared by some 48 percent the last decade—a good thing, but also a prime contributor to job loss in manufacturing. Job losses add fuel to questions about manufacturing's health, and to concerns about outsourcing and the growth of export manufacturing in China and other low-cost labor regions.

In fact, much of China's manufacturing output comes from joint ventures with multi-national companies—many of them U.S.-based. This trend is likely to continue. A recent survey of 950 midsize manufacturers—the sector most concerned with the Chinese threat—shows 38 percent of those surveyed plan on shifting substantial portions of their supply bases to China. An even more significant 46 percent plan on building or acquiring manufacturing plants in China.

Still, by most accounts, 2004 should be a solid year of recovery for U.S. manufacturers, and the general business outlook is for substantial growth. This growth, coupled with dramatic efforts since 2001 to reduce costs, will drive continued profit improvement. Finally, improved profit growth leads inexorably to business expansion and an improved investment environment.

For the American manufacturer to grab its fair share of this expansion, it must adopt an aggressive posture regarding two critical, inter-related themes: innovation and globalization.

Innovation—whether of products, business processes, services, and even business models—fuels competitiveness.

Globalization rejects the fool's gold of protectionism, embracing new markets and manufacturing strategies for a global village. Transportation and communications advances, coupled with rationalization of trade barriers, make globalization a cost-effective and necessary growth strategy.

Growth, however, will prove impossible for those obsessed with cost cutting or simple-minded asset utilization. Low-cost strategies—while necessary—are not the path to sustainable growth, profitability, or longevity.

The low-cost obsession of the past 10 years comes at a price. For one, R&D spending has drifted lower. The Product Development & Management Association, Mount Laurel, N. J., says it sees a marked drop between 1995 and 2003 in introductions of innovative products, as opposed to incremental enhancements. Even more troubling is the shift toward a fast-follower strategy. In 2003, 37 percent of companies said they were fast-followers—up from 27 percent in 1995. With all these followers, who's leading?

Innovation on the product side has a powerful impact on the bottom line. Work done in 2001 by product development guru Robert G. Cooper shows that for most companies, the percent of sales from new products averaged 33 percent, while the best companies derived 49 percent of their revenues from new products. The payback is astounding as well: ROI for successful new products averaged greater than 96 percent.

Can anyone say the typical "new product development & launch" process is anywhere near what's needed to survive in today's globally competitive supply chain? Too often, products are commoditized before their development costs can be recouped. The imperative to invest in product innovation couldn't be clearer.

Equally important, innovative products stimulate demand from foreign markets—creating the ability to sell more American products in Japan, Europe, South America, and yes, even China. Again, excessive caution may prevent many manufacturers from getting the boost they need here. AMR Research surveys show that the great majority of midsize manufacturers view China only as a source of low-cost manufacturing labor, and not as a major market for consumer and other type goods.

With its huge population and low-cost labor rates, China has become the lightning rod for manufacturing's most closely held anxieties. Today, 28 percent of manufacturers see China as a major competitor—up from only 18 percent a year ago.

Protectionism is not the answer here. While insulating U.S. home markets from competition, protectionism is ultimately harmful to consumers. The real opportunity comes from expanding horizons. This cannot be overstated. Business processes good enough for a domestic market look feeble in the context of managing a global operation.

Like innovation, globalization must become a core capability for manufacturers of all sizes. Globalization in this respect means strong, singular processes supported by effective technologies. For large companies, this can be a matter of elevating divisional successes and strengths to a global level. For midsize manufacturers, it's often a matter of reach and partnering.

Successful companies will be those that orchestrate complex supply networks to create new profit platforms. Gone are the days of vertically integrated manufacturing. Instead, global supply networks will subsume design, product launch, collaboration, sourcing, manufacturing, and distribution. While there have been many good supply chain management projects over the past 10 years, very few are actually managing global supply activity or delivering to their true potential. That's because existing supply chains are managed for localized optimization of cost, resource use, and logistics. Great tactics are no substitute for an incomplete strategy.

The big money and real competitiveness will come when systems are deployed globally. However, for companies to make this leap, compensation and incentive plans need to change in manufacturing and logistics, and marketing and sales.

IT delivers the fabric to speed innovation and allow differentiation. American manufacturers have an advantage here, with far greater infrastructure and technology resources than most global competitors—save for some European multinationals.

Globalization can be self-funding. AMR Benchmarking research shows that in numerous industries, strong supply chain performers save 7 percent to 8 percent of revenue in total supply chain cost when compared to weaker peers in their industry.

Unfortunately, a persistent hangover stemming from the 1990s binge of irrational exuberance remains with respect to investment and business expansion. Maintaining the cautious posture of the past several years, many manufacturers' spending patterns leave little or no room for strategic investment—especially that required to bring board-level decisions to bear on global process investment. Granted, economic factors such as GDP growth or consumer confidence, and competitive motivators such as time-to-market and price optimization strongly influence IT spending. Nevertheless, it's time for manufacturing executives to step up to the challenge of top-down strategic global planning and innovation in all its forms.