What Kind of U.S. Manufacturing Survives?

The U.S. economy is about to enter its fourth year of recovery. One wonders how that is possible when pundits proclaim that China has all but hollowed out the American manufacturing base. Could U.S. manufacturers actually be doing something right, as evidenced by growth in manufacturing productivity?

It’s true the Chinese have a formidable cost advantage when it comes to the manufacturing of textiles, shoes and cheap furniture. But the U.S. has much more experience and, as a result, expertise when it comes to durable goods such as appliances, autos, computer equipment and airplanes and even packaged goods. In these areas, U.S supply chain innovation has led to a total reengineering of industrial practices.

In the Henry Ford model of manufacturing, as practiced in China, the plant manager employs long production runs to create an inventory of goods. The inventory is then drawn down to meet the needs of wholesalers, retailers and, ultimately, consumers. This is nearly divorced from market intelligence.

By contrast, manufacturing according to the Michael Dell, neo-American model is based on real-time information on product demand so units can be built to order. It is a far more direct, more intimate relationship with customers. It’s a process overseen not by assembly-line foremen but by procurement people at the highest corporate levels.

Ideally, modern supply chain management should allow for mass customization, online supplier bidding and even distribution channels crosslinked to production lines. One technology enabling this is radio frequency identification. Both Gillette and parent Procter & Gamble have opted for RFID because it conveys far more information than bar codes. They can track products from the factory floor to the checkout line in seconds. And since retailers routinely report that about 8 percent of items are out of stock on any given day, the technology is certain to boost distribution and sales.

Clearly, this is the beginning of a revolution in data collection, a kind of E-Z Pass for warehouses and stores that will save enormously in time and labor costs. RFID is key to the emergence of smart products.

The next step is using the tags to gather work-in-process information, setting the stage for highly transparent Internet-based collaborative manufacturing. Such a system would take in a vast network of intelligent sensors to collect and disseminate data generated by the customer, the factory floor, the warehouse and even the retail outlet. The quantity of parts, work in process and inventories would be available real-time and remotely via wireless links.

Working together as if in a partnership, the customer and the manufacturer would use the system to enhance quality, reduce cycle time, increase flexibility, weed out flaws, boost productivity and improve customer satisfaction. These systems would bring manufacturing to the next level of lean production, where the customer actually becomes part of the production team.

Approaches such as these confer upon U.S. manufacturers the means to compete and win€¦quot;even in the face of China’s monstrously favorable cost advantages. Admittedly, there are going to be sectors that continue to migrate such as computer and semiconductor manufacturers that rely on standardization and raw materials easily found in China. However, other industries will continue to favor the U.S. Pharmaceutical and specialty chemical makers, for example, will continue to base manufacturing in the U.S. because of regulatory standards, proximity to R&D and the need for highly refined processes, materials and water.

The U.S. is a key source of R&D and innovation, so U.S.-based players have faster access to the technologies that help improve manufacturing. Innovation, therefore, is an intangible factor of production, one that is nontransferable to other nations in the short run. That bodes well for a long-term competitive advantage for the U.S.

George Nolen is president and chief executive of Siemens Corp., the U.S. subsidiary of Siemens of Germany.