RSM Resources

Small and midsized manufacturers (SMMs) are a driving force in our nation’s economy. They represent more than 99 percent of the U.S. manufacturing industry and account for 40 percent of U.S. production value.

Although faced with mounting evidence of an economic slowdown and strained credit market conditions, it’s important now more than ever for SMMs to maintain growth rates and remain globally competitive.

American manufacturers continue to lead the world in originality, as evidenced by higher R&D expenditures and utilization of nanotechnology in manufacturing than other countries. Innovation isn’t only the development of new products and product line improvements, but also the introduction of new technologies and enhancements into the manufacturing process.

Often, a new manufacturing process is the precursor to a new product that can be commercialized for the marketplace. But that lead is being threatened as rapidly advancing globalization of supply chains and rising education levels internationally have slimmed the U.S. manufacturer’s advantage. Internal challenges abound as well, including a lack of senior management buy-in to the innovation process, poor understanding by employees of the repercussions of subpar quality, and the absence of community college and other training partners who can help build employee skills.

In addition, the ability of a manufacturer to produce consistently to cost, quality and delivery objectives is becoming even more critical to the organization’s ability to compete effectively in a globalized marketplace.

Although developing lean strategies allow SMMs to differentiate themselves from their competition through customer value, SMMs have been slow to adopt. The reluctance of small and midsized manufacturers to apply lean principles undermines their bottom lines. U.S. plants that have implemented at least one of the lean approaches report a median 35 percent gross profit margin and $197,000 sales per employee, versus just 31 percent gross profit and $150,000 for those not implementing lean.

This “lean gap” faced by SMMs is especially surprising because lean is an approach small companies can afford, requiring them only to understand the processes, identify wastes, address the root causes of problems and then improve the process with available resources.

Companies implementing lean processes have found that as operations become more efficient, the firm can redistribute workers into new areas, keeping staff employed and growing a cross-functional workforce in the process. Ideally, increased value for customers and more nimble responsiveness leads to new business opportunities and increased capacity.

SMMs need to be prepared to provide design capabilities on the front-end and delivery responsibility on the back end, where in the past SMMs merely produced to specification. This requires investment in the resources necessary to provide these capabilities for customers.

Recently, RSM McGladrey co-authored and sponsored a report with the National Association of Manufacturers and The Manufacturing Institute on SMMs that identifies pressing challenges for the industry. It concludes best practices for harnessing innovation include:

• A better-informed team. As products change, employees need to understand what would happen if new products are not produced correctly. Companywide education in lean methodologies and principles should be paramount.
• A rewarded team. When employees excel with innovative ideas, they deserve recognition. This will foster champions who will lead the charge to develop new products, improve performance and ensure successful processes are integrated throughout the company.
• A better-informed customer. It’s important to communicate with primary customers about lean experiences and new roles in innovating. Customers should understand that at times they need to share risks and costs for new product development if it’s to be a successful partnership. The new value chain works best when there’s trust and mutual support within the chain.
• A high-tech college partner. Local colleges, universities and technical schools can provide tremendous assets for SMMs with new innovation mandates, especially when the local college has technological capabilities that the company doesn’t have.
  

Lean and other improvement approaches enable companies to innovate how they do what they do. But they must not forget to innovate the who and the what. A culture of innovation should permeate the company, fostered by CEOs who reward fresh ideas and risk-takers.

Every SMM embarking on a lean initiative should have a plan for how it will leverage its freed-up capacity and working capital to improve growth — whether it’s introducing new products or entering new markets.

In today’s dynamic markets, innovative leaders find ways to deliver new, high margin, value-added services to their customers. Maintaining and fostering a skilled workforce — which advances lean initiatives — will ensure that SMMs can successfully navigate a competitive global marketplace.

This article originally appeared on Manufacturing.net – Feb. 8, 2008.

Tom Murphy is managing director with RSM McGladrey. For more information, contact him at tom.murphy@rsmi.com.