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Survival Of The Fittest

Small manufacturers adapt to today's evolving markets.
September 1, 1997
URL: http://www.entrepreneur.com/article/14552

In days gone by, the factory floor was a loud, equipment-laden place with assembly lines clinking and clanging, and belts whirring and groaning. Today, in large part, that world is gone, replaced by the relative silence of computer-driven machinery. The change is indicative of the manufacturing sector's metamorphosis over the past 30 years.

Those changes have had enormous impact, not only on those in the industry, but on the American economy as a whole because, as one academic puts it, "manufacturing is the engine that drives our economy."

According to the U.S. Department of Commerce, in 1992 (the latest year for which figures are available), manufacturing businesses employed more than 18 million people--about 15 percent of the American population. Although this is down from an average of 25 percent between 1960 and 1992, manufacturing nonetheless contributed $925 billion to the nation's gross domestic product in 1992.

Small businesses are a critical part of this sector. Of the 387,000 manufacturers in this country, 381,000 are small or midsized (having under 500 employees); the bulk of those--262,000--employ fewer than 20 people.

But these figures don't tell the whole story, says Wally Hopp, a professor of industrial engineering at Northwestern University in Evanston, Illinois, and co-director of the college's Master of Management in Manufacturing program. "If you look at how many jobs are tightly linked to manufacturing, you'll find over half the jobs in the American economy [about 60 million] are directly related to manufacturing," Hopp contends. "That doesn't even count the indirect effects. That's why I look at manufacturing as the foundation of the economy."

That foundation has undergone a profound transformation; during the 1950s and '60s, U.S. manufacturers ignored some evolutionary changes. The advent of computerized machines and a new understanding of how work flowed led to new philosophies on how factories should operate, explains Uday S. Karmarkar, director of the Center for Operations and Technology Management at University of California, Los Angeles (UCLA). Unfortunately, America was not at the forefront of this transformation.

By the 1970s, the rest of the world had rebuilt after World War II and become competitors. It took 10 years, however, for American manufacturers to realize they were being surpassed in many areas by their foreign competitors. This forced them into copycat mode in an attempt to catch up, says Hopp. "But that had mixed success," he says of the Japanese management techniques that took the industry by storm in the 1980s. "The Japanese did what was right for them, and there were particular reasons why they did things specific ways." Manufacturers that modified the imported systems to fit their own needs did fine, Hopp says, but those who blindly imitated fell on their faces.

Lagging Behind?

The majority of small manufacturers were not--and are still not--aware of many of the changes occurring in manufacturing, contends Kevin Carr, director of the Manufacturing Extension Partnership (MEP), a program of the U.S. Department of Commerce's National Institute of Standards and Technology in Gaithersburg, Maryland. "A lot of small firms are not taking advantage of the [latest] technology to make themselves more profitable," says Carr. "What's even more dangerous is that a lot of firms aren't even aware this technology is available.

"The primary reason [small firms] are not adopting state-of-the-art technology is cost. They may also feel they lack the expertise in-house to apply the new technology, or they may not know what to buy."

Although the going was rough initially, one Philadelphia manufacturer knew cutting-edge techniques would give his company a competitive edge.

"We needed a lot of help managing high-volume customers. And we wanted to ship as fast as possible," explains John Strotbeck, a former Olympic rower whose company, Boathouse Sports Inc., custom-manufactures athletic outerwear for high school, college, professional and international sports teams.

In 1993, Strotbeck decided to adopt kanban manufacturing, a Japanese technique that eliminates the need for lots of expensive unit production equipment. "You re-engineer the facility and manufacturing production so the whole factory is set up in small groups, and each group totally completes a project," he explains.

Among the challenges Strotbeck faced in adopting kanban technology was building trust between himself and his workers, who had to undergo cross-training. "In the garment industry, most people are managed under an `us and them' philosophy," says Strotbeck, adding that the industry also has a reputation for exploiting workers. Boathouse's switch to the kanban production philosophy helped the company achieve 30 percent annual growth and has kept the 100-employee firm at the top of a competitive niche industry.

But not all small manufacturers are able to overhaul procedures, and those that can't must find other ways to stay competitive. Marlene Alter, president of two auto-related companies in Gardena, California, relies on innovations instead of the latest technology to stay in the game.

"We don't have the latest computers, but I'm not sure having the latest is very important in a small corporation," muses Alter, who with her husband, Roy, runs Prestige Motorcoach Corp. and Era Products Inc., which handle high-end van conversions for Chrysler, Chevrolet and Dodge.

For the Alters, whose two firms together employ about 90 people, money is the deciding factor when purchasing equipment. "How long will it take to get a return on our investment?" she says. "Often `the latest' is very expensive, and the return is [often not worth the cost]. On a larger scale, you might be able to absorb the expenses, but it doesn't work that way in a small company."

Instead of relying on state-of-the-art technology, the Alters stay at the forefront of the industry by concentrating on product innovation. "We're always [developing new products], always trying to improve on what we're doing." Innovation and attention to quality helped the company grow 50 percent in 1996, and Alter expects similar growth this year.

Rules And Regulations

The high cost of modernizing equipment is not the only problem small manufacturers are grappling with. Among other challenges the industry faces, says Chris Braunlich of The National Association of Manufacturers, are product liability and overregulation.

"With product liability, it's not so much the cost of insurance but the cost of frivolous lawsuits and the amounts small manufacturers have to pay lawyers to settle a case," says Braunlich, citing one flag maker who was sued even though he did not produce the flag that had injured an individual. "In a [recent] survey of our members who have fewer than 500 employees, the aggregate cost of legal fees and settlements [over five years] was more than $25,000 per company for 36 percent of the companies," adds Braunlich.

The cost of complying with federal regulations is another demand that has small manufacturers up in arms. Dan Byrne knows exactly how much it costs to meet government regulations--three years, 3,100 man hours and about $80,000.

Byrne, who runs an industrial gas packaging and distribution company in Seattle, found his firm bursting at the seams in 1992. That, plus a fire code rule requiring more space, prompted the founder of Byrne Specialty Gases Inc. to seek a larger location.

After looking at some 75 buildings, Byrne found a site and bought it--contingent on the structure getting a clean bill of health from city and state agencies. He hired an architect, a contractor and an environmental lawyer to help negotiate the seemingly unending process.

"There is the perception that because we are in the business of chemicals and hazardous materials [there is danger], but most of [our chemicals] are nontoxic and nonflammable," says Byrne of the difficulty he had getting permits from the city. In the six months it took him to get permits, he had to deal with land use and construction issues, as well as submit a 40-page document outlining storage, protection and hazardous management plans.

The final hurdle was the State Department of Ecology's environmental site assessment, which found surface soil contamination and the need for ground-water monitoring. "We had to actually remove the soil," recalls Byrne--a process for which it took 10 weeks to get a permit. After all that, state-required ground-water testing found contamination, which effectively killed the sale.

Byrne found himself back at ground zero, $80,000 poorer but determined to find a location--this time to lease, not to buy. It still took a year and a half. What kept him focused was obligation and competition. "If I moved 30 miles away [something he considered], the cost of running trucks daily would be $100,000 a year," he recalls. "The other issue was responsiveness. All our customers are near the city center, and we needed to be [near them]."

Although he lost money, Byrne says he learned a valuable lesson: Get involved in the process. Work with regulatory agencies to create a mutual understanding, Byrne advises other entrepreneurs, and be prepared to negotiate instead of being confrontational. He admits, "I might have had a chip on my shoulder toward regulators at the beginning."

Over There

While manufacturers struggle with sometimes incomprehensible government requirements, they must also worry about overseas competitors. Foreign competition is an acute concern for micromanufacturer Bunny Connell, whose Huntington Beach, California, company makes ceramic products sold in department stores and gift shops nationwide.

Connell is constantly trying to stay ahead of low-priced knockoffs of her ceramics. "In my bath [products] line, pricewise I'm competing with ceramics from Taiwan and Mexico. The only way I can compete is to keep my quality and service up and keep the minimum [order] down," says Connell, whose 10-year-old Pacific Coast Ceramics employs six people and has annual sales of about $150,000.

In addition, Connell says she must constantly innovate, designing new lines or adding items to existing lines, hoping to gain a solid foothold with each in the year or so she estimates it takes competitors to find and copy her work.

One design that has been particularly successful for Connell is a ceramic toilet-brush holder shaped like a cat. "We were the first on the market with it and have a copyright on it," she says. "It's a good seller because it's something unusual that has not been seen before." At the height of the product's popularity, she says, the company was producing about 200 cats a day, compared with 50 units for a typical bestseller.

In addition to assaults such as those Connell faces, small firms are also indirectly affected by foreign competition. "A lot of small manufacturers produce [goods] for larger companies," explains Jack Russell, president of the Modernization Forum, an association whose member companies help small manufacturers modernize. When foreign companies take part of the North American market from those big U.S. corporations, Russell notes, small firms are impacted as well. The auto, electronics and apparel industries are prime examples.

To remain competitive, large corporations are downsizing, right-sizing and belt-tightening. This has resulted in tremendous changes--and new opportunities--for the small and midsized manufacturers that are these companies' supplier chain, says Carr at the MEP. "[Big corporations] are outsourcing more--more products are being built outside the company," he says. "They're also beginning to rely more on smaller firms, seeing them as an integral part of the production process."

While that can translate into new customers, it also means some entrepreneurs are feeling tremendous pressure to be more quality-conscious in terms of design and production. This may mean retooling to use more sophisticated machinery--an expensive undertaking with no guarantee the major corporations will help cover the cost.

Paul Dickinson, president and CEO of H-R Industries Inc., a Richardson, Texas, manufacturer of printed circuit boards, has found the secret to giving his larger corporate clients what they need. "Our philosophy is to overservice an account. We immerse all our people in that concept, and we get very creative in terms of competitiveness," explains Dickinson, whose 21-year-old firm has 330 employees and 160 clients, including Eastman Kodak Co., Lucent Technologies and Paradyne Corp.

"For example, my engineering crew came up with a way to put [circuit board] parts together more economically, which resulted in a significant savings to Eastman Kodak," Dickinson continues. "We had a similar experience using an engineering technique that reduced costs at Lucent."

Dickinson's dedication to cost-saving innovations has paid off. In the late 1980s, H-R was one of 17 companies supplying circuit boards to Kodak and was essentially a minor player. By 1994, H-R had become one of only two circuit board suppliers to the corporation.

A Look Ahead

Despite the challenges facing entrepreneurs in the manufacturing field, there are many bright spots on the horizon. Recognizing the importance of the small manufacturing sector to the economy, the federal government created the MEP, a partnership between private industry and state governments, to help small and midsized firms remain viable. The effort consists of establishing nonprofit centers that help link entrepreneurs with the resources they need to modernize.

According to Russell, every state has at least one center, and some have more. Most locations provide their services at a reduced cost.

The Delaware Valley Industrial Resource Center (DVIRC) in Philadelphia is one MEP center that was instrumental in helping Interconnect Systems Group Inc. find a computerized accounting system. Interconnect founder Walter Schroth says the new system was essential to helping his 11-year-old firm keep pace with the high-tech computer industry.

"We were shoehorning our accounting package to fit our needs and, consequently, doing a lot of extra work, which was very inefficient," says Schroth, whose Exton, Pennsylvania, company manufactures a standard wiring system for computer systems. "DVIRC did an extensive survey to find out what our computer and software requirements were, then selected from about 20 packages that accommodated things we were looking for. They made recommendations and also looked at it from a budgetary point of view. And once the package was selected, they helped us with training on the software."

Although many small and midsized manufacturers are trailing in terms of implementing advances, some are forging into the future via concepts such as virtual companies and agile Web manufacturing. Similar in theory, these two concepts revolve around the idea that a group of individual firms with distinctive specializations can join forces when necessary to bid on specific contracts, then break apart once the contract is over.

"In 20 or 30 years, I think you'll see more of the virtual factory through greater use of the Internet," speculates Dick Brown, a 23-year manufacturing veteran and director of industry applications for J.D. Edwards World Source Co., a manufacturing software developer in Denver. "Somebody in a little house is going to have an idea to make something. They'll put the project on the Internet; someone else will pick it up, design it and put it back on the Internet, where another individual with the technology to make the part will do so. Then someone with the sales capability will see it and think they can find customers, while another person will come in to do the distribution and delivery."

But this is still far down the road, and before small manufacturers can evolve to this point, the experts agree most still must learn to keep abreast of a rapidly changing industry by innovating instead of imitating.

The Gold Standard

As the u.s. manufacturing sector becomes ever more international, even the smallest companies must transform themselves into global players. One of the first steps toward this goal is meeting the international standard for manufacturing quality--ISO 9000 or ISO 14000.

The International Organization for Standardization (ISO), which involves 99 countries, works to promote standardization in relation to international trade. ISO 9000 is the measure developed for all companies; ISO 14000 is a set of requirements geared toward manufacturers and designed to help them meet international environmental-impact guidelines.

James Kolka, a lawyer in Murietta, Georgia, who specializes in liability issues related to ISO 9000 and 14000, says the U.S. auto industry has created its own adaptation of these standards (QS 9000) and has mandated all suppliers be certified by a certain date. The U.S. Department of Defense is also moving toward embracing the ISO 9000 standard.

ISO 9000 accreditation or certification requires companies to go through steps designed to control quality through statistical analysis and documentation. Companies are evaluated by certified examiners.

The cost of becoming ISO 9000-certified varies, says Kolka, but he estimates the cost of implementing the standards at $25,000 to $50,000, depending on how much of the necessary system is already in place.

McGraw-Hill Co. Inc. produces a handbook, Registered Company Directory, which tracks the number of U.S. companies that are ISO 9000-certified. It is available by calling (800) 773-4607. And the American Society for Quality Control (414-272-8575) can provide you with a list of ISO 9000 auditor training course providers nationwide, as well as a list of registrars--companies or organizations that will verify that your company meets ISO standards.

"Implementation of these standards is happening worldwide, and [the United States] is behind," says Kolka. But if America's small manufacturers hope to keep up with counterparts that have competed internationally almost from the start, they must put aside their cynicism and gear up to be players in a game that has moved to an international arena.

Contact Sources

Boathouse Sports Inc., (800) 875-1883, info@boathouse.com

H-R Industries Inc., 1302 E. Collins Blvd., Richardson, TX 75081, (800) 229-4653

Interconnect Systems Group Inc., (610) 524-9622, http://www.herme.com

J.D. Edwards World Source Co., (303) 488-4302, dick_brown@jdedwards.com

Manufacturing Extension Partnership, (301) 975-5020, (800) MEP-4MFG, http://www.mep.nist.gov

Modernization Forum, 20501 Ford Rd., Dearborn, MI 48128

The National Association of Manufacturers, 1331 Pennsylvania Ave. N.W., #600, Washington, DC 20004, (202) 637-3047.