NAM Report Identifies Challenges for Small and Medium Manufacturers in 21st Century Economy

Innovation, flexibility, speed to market, and closeness to the customer are the common characteristics shared by successful small and medium manufacturers (SMMs), says a new report from the National Association of Manufacturers (NAM). The report reveals 15 best practices that are followed by successful SMMs and identifies challenges faced by manufacturers in an increasingly competitive global marketplace.

The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues is a follow-up to a 2001 report on the importance of SMMs during the height of the 1990s prosperity boom. Since that time, a major recession has occurred causing many shifts in the manufacturing industry.

The report identifies two important trends that are shaping the future of SMMs. First, large manufacturers are increasing their dependence on suppliers of parts as they streamline their operations to increase productivity. This has been positive for many SMMs, the report indicates, as they have expanded businesses into areas formerly owned and operated by large manufacturers. On the flip side, however, the pressure to reduce prices is passed down the supply chain with the burden of cost reduction and innovation falling on SMM suppliers.

The second trend is the development of increasingly sophisticated production in developing countries, which has toughened the landscape for SMMs. In order to stay competitive, SMMs have to offer value to their customers that low-cost overseas competition cannot match, such as proprietary, high-technology products, a willingness to customize, and fast turnaround times, the report states.

While the U.S. remains the world's leading innovator in terms of R&D and patents granted, other fast-growing economies are catching up, partly because more of their students are earning degrees in science, engineering and math, according to the report. Additionally, SMMs are hit disproportionately hard by labor costs, including energy and health care, retirement benefits, tort litigation, regulatory compliance, and taxes. Foreign competitors, particularly from China, are continuing to drive down prices as structural prices continue to increase, leading SMMs to suffer a profit squeeze, the report shows.

Workforce issues and productivity also are a concern for SMMs. During the 2000-2003 recessions, more than 3 million jobs in manufacturing were lost. A recent article by the Federal Reserve Bank of Cleveland, Are We Engineering Ourselves out of Manufacturing Jobs?, focuses on the extent to which strong productivity growth in detailed manufacturing industries is associated with weak employment growth. According to the article, the long-run decline of U.S. manufacturing employment is just as much the result of declining consumption of manufactured goods produced in the U.S. as a share of total income.

Some of the challenges faced by SMMs have solutions that can be achieved partly through enactment or reform of legislation and regulations and through negotiations with international trade partners, the report suggests. NAM supports several policy issues in this regard, including regulatory improvement, energy legislation to reduce cost, leveling the international playing field by improving competitiveness in the global market, pro-growth tax relief, legal, health care and education reform, and federal funding and tax credits for R&D.

According to NAM, the report is intended for policymakers who may not appreciate the contributions and challenges faced by SMMs in their own states. The Future Success of Small and Medium Manufacturers: Challenges and Policy Issues is available at: http://www.nam.org/s_nam/bin.asp?CID=202515&DID=236457&DOC=FILE.PDF

Links to this paper and more than 3,000 additional TBED-related research reports, strategic plans and other papers can be found at the Tech-based Economic Development (TBED) Resource Center, jointly developed by the Technology Administration and SSTI, at http://www.tbedresourcecenter.org/.