Manufacturing Success in the Domestic Market

By Robert J. Martin

Published by Business First in the November 18-24, 2005 issue

The U.S. has lost its position as the world’s manufacturing superpower. In the new world order where manufacturing dominance will be shared among a few countries and trade blocks, the U.S. would be wise to choose its niche and position itself to successfully defend it.

This raises two questions. What is the appropriate niche for U.S. manufacturers? And what do U.S manufacturers need to do to be successful?

Finding a niche

Exactly what is our niche? Since the production of high volume, commodity products favors countries with low cost producers, U.S. manufacturers should produce low volume, highly differentiated products. This niche builds on the current high tech competencies of U.S. manufacturers and maintains our national defense capability that depends on them. Most importantly, this niche provides high wages that maintain the quality of life for manufacturing workers.

The second question, “What needs to be done?” requires a longer answer. To successfully dominate the low volume, highly differentiated product niche, the U.S. must excel in two areas. The first area is process excellence, commonly known as lean manufacturing.

Lean manufacturing is designed to eliminate waste in all forms from the manufacturing process. This includes all manufacturing activities from the receipt of an order to the delivery of the product to the customer. From a supply chain perspective, it includes the entire enterprise. Companies that achieve process excellence are typically characterized by lower production costs, higher quality and better service. In today’s competitive manufacturing environment, any company, regardless of industry, that fails to achieve process excellence is at risk.

Differentiated products

In addition to process excellence, U.S. manufacturers need to produce highly differentiated products. Differentiated products are the opposite of commodities. With commodity products, the customer has the choice of a number of products that have equivalent features, so the customer typically selects the product with the lowest price. Why pay more when the products are equivalent? A differentiated product offers the customer more value than the competitive products. Therefore a customer is prepared to pay more for a differentiated product as long as the customer perceives the additional to be worth more than the additional price. Since its production costs are higher, the U.S. must differentiate its products in order to compete with the lower cost of production in developing countries such as China and India.

The key to product differentiation is to provide the customer with added value. This may include improved form, function or fit. It may also include superior quality, faster delivery or better service. Since the added value is that perceived by the customer, the manufacturer must understand the customers’ needs and how much more the customer is prepared to pay to satisfy them. U.S. companies have excelled in customer knowledge.

They have also excelled in other areas that are critical for successful product differentiation: creativity, design, and strong brands that promise superior quality, reliability and service. U.S. manufacturers must maintain a competitive edge in these areas to excel in product differentiation. Maintaining this edge will be difficult as demonstrated by Japan’s strong product differentiation in the automotive and consumer electronics industries.

Build brand identification

Most Western New York manufacturers produce commodity products that are not well branded. Do these companies and their workers have futures? Perhaps. They are at risk, but they can significantly improve their chances of survival.

In the short term, these companies must lean their operations and/or outsource commodity components from low cost countries. The goal is to achieve costs as close as possible to their low cost foreign competition. At the same time, time they must quickly attempt to make their products appear as differentiated as possible. The goal is to provide value-added products that customers are willing to buy at a premium price.

Often, companies can take advantage of their proximity to customers to provide faster delivery, smaller batch sizes, and/or on-site services including inventory management and trouble-shooting to achieve a level of differentiation valued by their customers.

Many U.S. manufacturers currently produce commodity products. It will be nearly impossible for them to survive if they continue to compete with low cost countries making commodity products. U.S. commodity producers have two choices: find new products that are differentiated or change their customers’ perceptions of their products. Neither choice is easy.