While small and medium-sized manufacturers have benefited over the past two years from a broadly improving economy, their competitiveness is being severely tested by rapidly increasing energy and healthcare costs, expanding regulatory requirements, a shortage of skilled labor and a rising tide of offshore competition, according to a study released yesterday by the National Association of Manufacturers (NAM) and the National Manufacturing Institute.
The study, dubbed "The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues," was compiled from interviews with small and medium-sized manufacturers (defined by NAM as companies with fewer than 2,500 employees). It was written to influence lawmakers to support smaller manufacturers and to advance NAM's legislative and policy agendas, officials of the trade organization said. The report includes a list of practices that, if followed, can help small and medium-sized manufacturers succeed, according to NAM. They include:
- Stay in touch with customers and speak to them about their needs.
- Offer differentiated products and services to better develop competitive advantage.
- Develop export markets.
- Invest at least 3% of payroll in employee training and take advantage of training help from Workforce Investment Boards and government training programs.
- Develop a plan for management succession and estate planning.
- Monitor your business on a daily, weekly, and monthly basis with a set of key performance indicators.
- Strike a balance between purchasing the latest technologies and making unaffordable capital investments.
While the report encourages SMB manufacturers to
build technology into their products in order to differentiate from competing low-cost products, it does not emphasize the need for smaller manufacturers to invest more in production automation or enterprise software technologies to improve operational efficiency. Nor does the report encourage smaller manufacturers to engage in the kind of net present value return on investment calculations that larger manufacturers use to evaluate investments in automation technology and other capital equipment.
Instead, small and medium-sized manufacturers should take a "common sense" approach to investing in automation technologies and be careful not to overinvest, according to Bill Canis, vice president and executive director of the Manufacturing Institute, NAM's research arm.
"Manufacturing can be overly capital intensive as it is," said Canis in an interview with
Managing Automation. "A lot of companies realized following Y2K that it is possible to overdo technology spending. [Small and medium-sized] manufacturers need to take a common-sense approach and focus on things like lean manufacturing which doesn't require much technology."
The report, also sponsored by RSM McGladrey Inc., a consulting firm, notes that although they suffered during the recession of 2000-2003, SMB manufacturers remain the backbone of U.S. manufacturing and a significant generator of jobs, innovation, and wealth. From 2000-2003, the report says, the number of manufacturing companies in the U.S. dropped 11% from 333,000 to 298,000.
The impact on medium-sized manufacturers, however (those with 1,000 to 1,499 employees), was even greater. Nineteen percent of those companies went out of business during that period or merged with other companies, the report noted. Medium-sized manufacturers lost 28% of their employees during that period, the report noted, citing government figures.
Still, the NAM report says, SMB manufacturers continue to represent a large part of the U.S. manufacturing base. Forty percent of the total value of U.S. production is generated by SMB manufacturers, and 60% of U.S. manufacturing employment -- about 8 million jobs -- is found in small and medium-sized firms, the report notes.
What's more, SMB manufacturers account for an increasingly larger share of the country's manufactured exports. Ninety-five percent of small and medium-sized U.S. manufacturers export, more than triple the number that did so 10 years ago. They represent 15% of the country's total manufactured goods exports, the report says.
SMB manufacturers enjoy some operational advantages over their larger counterparts, the report points out. They tend to maintain closer relationships with customers, to be more responsive to market changes, and to be more innovative in terms of integrating new, differentiating technologies into their products.
But SMB manufacturers face a host of challenges that, if unaddressed, could inhibit competitiveness, the report says. The cost and supply of energy, for example, is a major concern. The report notes that over the past decade energy demand in the U.S .has increased 12%, while production has increased just 1%, driving up prices for liquid natural gas and other key energy products and making U.S. manufacturers less competitive than offshore counterparts. The report notes that not a single oil refinery has been built in the U.S. since 1976.
"[SMB] manufacturers are being slaughtered by energy costs," Canis said. "If this continues, many won't stay in business."
SMB manufacturers also face growing cost pressures due to rising healthcare expenses, tariffs, other regulatory compliance requirements, and tort litigation. Asbestos-related tort cases to date, for example, have affected 8,400 manufacturers and led to 70 bankruptcies and the loss of 60,000 jobs, the report claims. One-third of the affected companies have been small and medium-sized manufacturers.
To remove some of these challenges, the NAM report recommends several legislative and policy steps. While the report calls the recently enacted Energy Policy Act "a good first step," it advocates more energy resource development, including drilling in the Outer Continental Shelf and Arctic National Wildlife Refuge, which are currently protected.
The report advocates a strong Office of Information and Regulatory Affairs within the White House to oversee proposed regulations that would affect manufacturers.
And the report pushes for ongoing free trade liberalization that, it says, could reduce tariffs that continue to limit exports by U.S. manufacturers.
The report also advocates lower taxes for manufacturers, including abolition of the Estate Tax and liberalization of investment tax credits. Personal income tax cuts of recent years should be made permanent, the report maintains.
To reduce healthcare costs, the NAM report recommends programs that would encourage employees to manage and pay for their own healthcare. These include health savings accounts, health reimbursement arrangements, and flexible spending accounts.