August 2006 – The Future of American Manufacturing: Brains, Not Brawn

A decade ago, one would rarely hear the words “American manufacturing” and “upswing” together in the same sentence. Indeed, the nineties were a time of reckoning for manufacturers, large and small. But in recent years, things have begun to change. Despite all the attention given to manufacturing outsourcing and global sourcing, domestic manufacturing net profits are indeed on the upswing. In fact, they have reached and maintained near double digit annual growth rates since the end of the last recession, according to the Bureau of Labor Statistics.

Of course some of the headlines tell a different story: GM continues to lose billions a year; Visteon and Delphi dance the bankruptcy ballet—or at least flirt with the edge of the stage; and unionized manufacturing ranks shrink to new levels almost every month. With headlines like these, it’s easy to question where manufacturing growth is coming. But if you dig below the sensational media reporting, the good news quickly speaks for itself. In a recent article in The Economist. “Lean and Unseen”, the authors suggest that U.S. manufacturing is going through a renaissance of sorts, with significant and sustainable increases in productivity and profit.

Where are the productivity points coming from? “Brains, not brawn” perhaps best captures the root cause of the gains. To prove this point. The Economist cites the case of Littlefuse, an electrical circuit firm, that was able to redeploy a 10,000 square foot warehouse facility into new plant space by going lean and receiving “its raw materials—such as resins and high grade zinc—“just-in-time” to pull them through its production line.” Lean programs helped Littlefuse. to drastically cut back on “its need to store raw materials, unused scrap, unfinished goods and other sorts of wasteful material.” Not only was Littlefuse able to improve its capacity through this initiative, it was able to do so without an increase in its overall footprint.

When it comes to American manufacturing survivors, the Littlefuses are becoming a little more common. One wire harness manufacturer that we have worked with was purchased out of bankruptcy. The CEO, a ruthless turnaround expert, implemented Lean and has managed double digit growth in sales and profits. His non-union employees and contractors all make significantly more than minimum wage; and have built valuable skills which are transferable to other organizations. Moreover, the company has specialized in areas where low cost overseas suppliers cannot compete—namely high product mix. low. volume wire harnesses. As a result of its competitive pricing, high quality, and razor-focus on a specific sub-segment of the wire harness market, the company has recently won several substantial contracts from major OEM’s.

But Lean is not the only solution U.S. companies have deployed to stay competitive and improve productivity and operating efficiency. Here in the midwest, a group of small manufacturers have banded together to form the Manufacturing Alliance, Rock River Valley or MARRV. MARRV is focused on “developing and implementing flexible manufacturing networks consisting of community based manufacturers, engineering, financial, legal, government, and private industry. MARRV works to penetrate new manufacturing markets, and also strives to remain competitive with larger manufacturers who are already outsourcing components to efficiently meet the demand of today s customer.”

By focusing on productivity and efficiency while also leveraging collective resources from different sectors within the same region, U.S. manufacturers will be able to continue to thrive in a global market—even when offshore suppliers have significant labor cost advantages. But continued profit and revenue growth in the manufacturing sector will also be dependent on state and Federal government policy—and in the some cases, the absence of policy—that continues to promote growth. Encouraging labor flexibility and rewarding companies with the right set of long-term incentives to invest in productivity will reward our manufacturing economy as a whole, preserving jobs and helping improve our competitiveness in a global economy.