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May 2011
Manufacturing a Made in America Economic Recovery
By Ric Stolzenberg

     People all over America want to know what it’s going to take for the economy to turn the next corner into full-blown recovery.

     Here’s one simple answer: We need a Made in America economic recovery.

     In other words, strong U.S.-based manufacturing is critical to a strong economy. We must fuel its resurgence by investing in a 21st century business model through innovation, adaptation and reinvention.

     The financial crisis that began in 2008 has forced the U.S. to look squarely at the radical changes of the last decade. Technology has shoved aside the Industrial Age. Information has become the currency du jour. The dollar is weak. U.S. consumers have tightened their belts and the growing Asian middle class cannot yet replace them as world-class consumers. Jobs have disappeared by the hundreds of thousands—many of them shipped offshore. More than 50 percent of the products Americans use or consume today are made outside the U.S.

     To reverse these trends and emerge into a global marketplace where the Made in America brand once again has value, leaders in manufacturing must commit to rethinking business models that worked in the previous century’s economy and reinvent for the challenges of today’s marketplace.

 

Mass Exodus

     The challenge to manufacturing is best understood by first looking back more than a decade. Consumers demanded lower prices. Shareholders expected higher returns. Global trade practices made it hard to compete. Skyrocketing health care costs, environmental regulations, vanishing tax incentives and the high cost of homegrown labor all made it increasingly difficult for U.S.-based manufacturers to compete on both the global stage and here in America.

     In response to these factors, manufacturers discovered what seemed to be the solution to their dilemma: Off-shoring. By taking manufacturing offshore, where labor was cheaper, profit margins could go up without increasing the price to consumers. American manufacturers made what came to be a mass exodus in pursuit of a more profitable business model.

     Ultimately, of course, we’ve seen the negative outcomes that come from fewer jobs, shrinking disposable income and lower levels of U.S. consumption. Offshore manufacturing, we have discovered, is not the magic pill.

 

Renewed Opportunity

     When you look under the hood of this business model, as manufacturing executives have been doing at an accelerated pace, serious challenges exist.

     The total cost of managing extensive supply chain networks has risen dramatically. Labor inflation in countries like China and India is severe; in China alone, labor costs have increased 17-plus percent a year and are projected to continue escalating. Logistics costs, due in large degree to the price of oil, are high. Delivery cycles are long and inflexible, yet the cost of capital is such that companies can no longer maintain high levels of finished goods here in the U.S. At the same time, customers expect delivery on demand; they are no longer satisfied to wait for their goods to be manufactured, shipped and delivered.

     These challenges create a renewed opportunity for U.S.-based manufacturing. To capture this opportunity, we must solve the fundamental challenges that drove manufacturing offshore in the first place. Innovative business models, responding to cost, quality and delivery expectations, need to be established. The hurdles cannot be overcome with a single narrow focus, but require solutions that encompass all aspects of the business model.

 

Radical Reinvention

     Some years back, a major manufacturer determined that the costs of one of its U.S. factories had become 40 percent higher than a comparable offshore operation. The alternative to shutting down the U.S. facility and moving offshore would require more aggressive remedial action than a series of incremental cost improvements.

     While other manufacturers in the U.S. were trying to make headway with annual 5 percent cost productivity challenges, this manufacturer decided to shoot for cost parity with the offshore operation. It would require a radical, step function change.

     The solution was to sell the factory to a third party, providing the new owner the freedom, flexibility and unburdened thinking to reinvent the factory’s business model from the ground up. The reinvention process was a success, and the original manufacturer continues to buy from the third party and remains globally competitive.

     In today’s marketplace, the need to regain competitive edge is more urgent and many organizations’ financial positions have been weakened by the economic drought. For many, the way out of current circumstances lies in the deployment of capital. But healthy capital partners are looking for a healthy enterprise, one that is investor-ready.

     One of the most significant markers that a business is investor-ready is leadership’s ability and willingness to implement business model innovation with clear and measurable potential to yield profitable growth.

 

The Comeback

     A 2010 study prepared for the National Association of Manufacturers and the NAM Council of Manufacturing Associations pointed to beliefs in the industry that solutions rest with policy changes in areas such as corporate tax reduction, permanent R&D tax credits and governmental investment in infrastructure. These measures could be a boon for manufacturers.

     However, the greater boon lies in recognizing that manufacturers can affect their own resurgence. They need not wait for the uncertainty of government policy decisions. Manufacturers can be in charge of their own comeback.

     For U.S. manufacturers committed to play to win, business model innovation must address total cost productivity—direct, indirect and overhead. The challenge will not be as simple as coming up with fresh ways to drive productivity. And it certainly won’t be as simple as waiting for the current or any future administration to save the day. Company CEOs, CFOs and supply chain executives must also commit to reinventing their business models for the 21st Century marketplace.

     The U.S. can compete again in global manufacturing. Doing so begins with manufacturers whose executive leaders can execute boldly in order to meet the critical need for a strong Made in America comeback, not just for manufacturing but for the broader economy as well.

     Content provided by Ric Stolzenberg, leaderof the Industrial sector for The Performance Group, a 17-year-old consulting firm that specializes in business model innovation and strategic thinking. For more information, contact him at 704-597-5156 or ric@theperformancegroupusa.com.

Leader of the industrial sector for The Performance Group, Ltd.
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