01 Dec 2003
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Can Manufacturing Keep Its Edge?

Re: Mike Katz (MBA 1994); Linda Katz (MBA 1994); Jerry Jasinowski (AMP 97); Steve Macadam (MBA 1988); Tim Timken (MBA 1962); Lauri Union (MBA 1992)
by Julia Hanna

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“Pretty straightforward. Pretty frightening.” That’s how Jim Sharpe (MBA 1976), chairman and CEO of Extrusion Technology, Inc. (ET), describes an out-of-the-blue situation his company faced two years ago, when its largest customer announced that it would no longer accept ET’s American-made aluminum panels. Instead, the panels would need to come from Asia — a considerable challenge for an eighty-employee company based in suburban Boston.

Sharpe’s response was equally direct. ET partnered with a company based in Singapore and shipped it panel pieces to be assembled on demand for the Malaysian customer. ET then went a step further, locating an aluminum extruder in China that would manufacture some of the parts used in the panels. “We ship in 48 hours from our Singapore partner’s warehouse to the customer’s facility,” Sharpe says. “Our goal is to present a desirable solution to our customer base. As a result, they get cost savings, and we get sales.”

Welcome to the new reality in U.S. manufacturing, where, more than ever, intense foreign competition is driving product and strategy innovations. Even those firms without direct foreign competition find themselves in a race to innovate in order to offset the negative impact of a sagging economy and sharply rising employee benefit costs.

Over the course of the past three years, U.S. manufacturing has shed some 2.7 million jobs, with companies marshaling technology and ever-leaner operations strategies to boost fewer workers to higher levels of productivity. At 5.4 percent, 2002 saw the biggest annual gain in productivity growth since 1950. Like many consumers, companies are tightening their belts and doing more with less in an effort to survive, and thrive, at a time when making things in the United States is more demanding than ever.

The Bulletin spoke to a sampling of alumni to get a view from the factory floor of how they plan to meet the challenges ahead. While the companies vary in size and make a diverse range of products, these owners, chairmen, and CEOs present a snapshot of a core business activity for which relentless innovation and laser-eyed attention to detail are the primary drivers of success. And despite, or perhaps because of, those demands, these manufacturing executives also describe the sense of deep satisfaction their work can bring. (See “Flex Time ”)

China: Competitor and Partner

Michael and Linda Katz (both MBA 1994) considered thirty different companies before buying Molded Dimensions, Inc., a manufacturer of rubber and polyurethane products located outside Milwaukee, Wisconsin. Since purchasing the company in April 2001, the Katzes have concentrated on expanding their sales representation into new territories and increasing worker efficiency. “We have three hundred customers in thirty different industries,” notes President Michael Katz, explaining that this diversity and the company’s proprietary formulas for its rubber and polyure-thane give them some leverage in pricing. Like Extrusion Technology, however, Molded Dimensions has experienced a new level of competitive pressure from Asia, particularly China.

“If the widget is the size of a softball or smaller, you can ship it from China for less than we can make it here,” says Katz. “So I’ll make anything that’s larger than a softball here — but I might make it with a tool manufactured in China. Then I can give my customers the best of both worlds — a low tooling cost up front, and high-quality, low-cost parts made here.” Katz says he’s also begun to import some smaller molded rubber products that are easier (and cheaper) to manufacture in China.

So depending on one’s perspective, China can be seen as both a challenge and an opportunity for U.S. manufacturing. For Sharpe and Katz, it is competitor and partner.

As a competitor, there’s broad agreement that China maintains an unfair advantage by officially undervaluing its currency. The Chinese government has pegged the yuan at 8.3 to the dollar since 1996, which undervalues it by 15 to 25 percent, according to Morris Goldstein of the Institute for International Economics in Washington, D.C. The resulting trade deficit ($100 billion in 2002) is a sore spot for anyone who has watched their business — or job — go overseas. As the 2004 presidential election nears, many wonder if, when, and how the issue will be addressed. U.S. Treasury Secretary John Snow has visited China in an effort to persuade government authorities to move to a more flexible currency system, which they have agreed to do — but the time frame remains unclear.

For his part, Jerry Jasinowski (AMP 97, 1985), president and CEO of the National Associ-ation of Manufacturers (NAM), professes an unshaken faith in the ability of American innovation to meet foreign competitive challenges. He recalls when the specter of “Japan, Inc.,” was one of manufacturing’s looming concerns. “We’ve been through a cycle of lost competitiveness followed by renewal,” observes Jasinowski, who once worked on the Studebaker assembly line in South Bend, Indiana. “Now I think we’re back to the same place again with respect to some of the issues raised by China.”

Innovation and continuous improvement are the keys to moving to a stronger competitive position, he says. “We changed more than the Japanese did. The Chinese are more entrepreneurial, but they have their own challenges to confront with respect to government and economic restructuring,” Jasinowski remarks, referring to the disruptive movement from state-owned enterprises to newer plants funded by foreign direct investment.

Getting Close to the Customer

Foreign competition isn’t a concern for Stephen Macadam (MBA 1988), president and CEO of Consolidated Container Company (CCC). Headquartered in Atlanta, CCC has some 4,500 employees and manufactures its plastic containers at 68 different plants. Of these, 24 are on-site with customers and 5 are located in Canada, Mexico, and Puerto Rico. “Once you make a bottle, it’s costly to ship it far because there’s a lot of air you’re moving around,” he explains. “This is very much a local business.”

Consumer preference for plastic and the marketing trend toward rejuvenating a brand with new packaging designs have been pushing the plastic container business to innovate, Macadam says. But the consolidation of large food manufacturers has resulted in significant margin compression for his product. That brings CCC’s customer service capabilities to the fore, he continues, describing how the company worked with Frito-Lay to design an hourglass-shaped container for its “Go Snacks” line. “If you look at it, you might think, ‘Oh, it’s just a plastic bottle,’” says Macadam. “But there’s more technology involved than you’d think. There are four layers in the wall of that container — one layer is an oxygen barrier to give the product nine months of shelf life.”

Product innovation and customer service initiatives have also been key to development of The Timken Company, a 104-year-old bearing and steel maker based in Canton, Ohio, with 28,000 employees worldwide. Chairman William R. (“Tim”) Timken (MBA 1962) describes how the company’s engineers integrated a sensor into the bearings used on light trucks that would not only serve the friction reduction purpose of the bearing, but also be the sensor for the antilock braking system. As a result of this added value, Timken is selling more than $200 million in the light truck market, up from $40 million in 1993 when the bearing was first introduced. The company is also focusing on new outlets for its products, having just developed an integrated flex pin bearing for the nascent wind energy market. This product, used in wind turbine transmissions, extends the life of both the bearing and the surrounding components. “Our bearings are known for superior performance in harsh applications. This new line of wind energy bearings positions us to capitalize on a growing market,” says Timken. “We invest $78 million a year in research and development to deliver innovation that brings real value to our customers.

“Innovation isn’t just about engineering discoveries,” Timken adds. “It also means getting close to customers, understanding their needs, and finding ways to address them.” Doing so was part of the process of creating the company’s custom line of bearings and seals for automotive parts suppliers such as AutoZone and Parts Plus. Developed in 1997, the line continues to expand and contribute to the company’s overall sales, which totaled $2.6 billion in 2002.

Delivering on the Details

When Lauri Union (MBA 1992) graduated from HBS, she was presented with a choice: accept an attractive offer from the Boston Consulting Group or take on the task of turning around Union Corrugating Company (UCC), a corrugated steel roof-ing and siding manufacturer founded in 1946 by Union’s grandfather. Eleven years later, Union, president of UCC, has no regrets. The company, based in Fayetteville, North Carolina, has experienced a compound annual growth rate of over 19 percent, due in large part to strategies that have included redesigning and introducing new products, reexamining company management, and expanding its customer base. The majority of UCC’s orders are custom-cut for individual jobs. That fact and the time and expense that would be incurred by shipping heavy steel siding from abroad mean the company’s competition is local rather than global. In addition to pressure created by a swiftly consolidating industry, UCC faces competition from a growing number of small manufacturers that sell directly to homeowners and to contractors.

To gain a competitive advantage, Union visited potential customers and interviewed them about their preferences for a par-ticular kind of corrugated panel used for animal enclosures. She then worked with a structural engineer to design a new version of the product with higher steel content and wider ribs so that the panels were easier to nail together and channeled rain water more effectively. Union says she’s found this kind of attention to detail and level of customer interaction to be characteristic of a seemingly simple business that continues to demand new approaches to management and product design.

Attention to the simplest details, it seems, can lead to dramatic change. Jim Sharpe of Extrusion Technology laughs when he describes some of the initiatives his company undertook. Far from high tech, one of the changes included moving machines closer together so that parts wouldn’t have to travel from department to department. ET also worked with an outside service provider that was cleaning their aluminum parts to reduce turnaround time from five days to one. The number of times the parts needed to be unpacked, loaded, and repacked was reduced by simply delivering the parts to the cleaner in baskets that could be hand-dipped in the solution. As a result, cleaning costs dropped by 75 percent.

“We looked at every step of our process to see where the bottlenecks were,” Sharpe says. “Our overall lead time has been reduced from eight to three weeks. Now we’re competitive at a completely different level.”

The Future Is Now

Between 1992 and 2000, manufacturing accounted for 22 percent of U.S. economic growth (28 percent if software production is included) and was responsible for two-thirds of spending on R&D. It’s unclear whether manufacturing’s overall contribution to the economy will shrink along with its employment base. The sector’s future is a topic of heated debate between those who see the United States shifting to an economy of ideas and others who believe the nation’s stability depends on a broad base of economic activity, including manufacturing. Whatever the future holds for manufacturing, alumni interviewed for this article agree that in a business that demands continuous innovation and improvement, change will be one of the few constants.

“The best way to prepare for external forces is to be open and willing to change,” says Extrusion Technology’s Sharpe. “There’s going to be a lot of fallout in global manufacturing over the next ten years. You have to turn opportunities to your advantage rather than run and hide.”

“When a company employee asks ‘Why is this happening? Why do we have to work harder and smarter?’ I tell them to go home and look in the mirror: You are the reason,” says Timken. “You want to buy a better value car from Korea; you want to wear clothes from Hong Kong. Global competition makes us run faster, and the resulting value to the consumer and manufacturing’s contribution to the American standard of living is enormous.”

“We don’t have the luxury of saying that we’ll ride this out,” notes Katz of manufacturing’s current slump. “We don’t think there’s anything to ride out — this is the future. We’re seeing it right now, at a time where customers only know they will pay less for something tomorrow than they do today.”

There will continue to be niches in U.S. manufacturing for low-volume production, notes Sharpe, where investment is high, turnaround is important, and speaking the same language is a factor in getting the job done efficiently. High-volume manufacturing — unless the product is too expensive to ship — will continue to migrate offshore. “If there’s any market that’s going to do well in the global economy, it’s transportation,” he adds.

Manufacturing will also become increasingly service-oriented, observes Jasinowski of the NAM. More and more, businesses are providing completely assembled systems to their customers rather than individual parts, a trend confirmed by Timken. “We’ll continue to move our business out of some of the more commodity-oriented products into those with a higher value-added for the customer,” he states.

Adapting and growing through change is one of the business world’s oldest mandates, but manufacturing offers the most dramatic examples of what can happen when companies succeed or fail. Ten years from now, suggests Katz, the challenges to man-ufacturing will have shifted again. “At that point, we might be talking about all the jobs that are going to Africa,” he says. “Yet U.S. manufacturing remains, because we manage to find better ways to do things. Are we going to continue to do that? I think we will.”

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Class of MBA 1976, Section H

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