The picture for U.S. manufacturing is better than in recent years, but it’s not perfect, as the rising costs of health care and raw materials eat into revenue gains. As a result, U.S. manufacturers need to continue to seek ways to be more efficient and more valuable to their customers.

That was the message from John Brandt, CEO of The Manufacturing Performance Institute (MPI) Group, who presented his popular afternoon keynote address in May at the Manufacturing Matters! ‘06 conference in Milwaukee. Brandt, a management systems expert, shared metrics showing that U.S. manufacturers have made gains in recent years, including improved first-pass yields, cycle times and on-time deliveries.

“What’s striking right now is that revenues are up and a lot of operational metrics have improved over the last three years,” said Brandt. But health care costs continue to climb, with a median increase of 12%. In addition, 91% of manufacturers have seen raw material price increases. In the end, the numbers show increased costs just edging out gains from improved revenues and pricing power.

To respond to rapidly changing conditions, Brandt recommends manufacturers develop a dashboard broad enough to provide:

• Actionable market intelligence. Companies need to know how they rate compared to others in their industry. Good market intelligence can also indicate whether a firm is heading in the right direction, if it has sufficient velocity to achieve its goals and if it has the capability to stop or turn as the market dictates.
• Direction in creating customer value. The key is knowing what customers want and value.
• Help in solving operations problems. Correctly identifying problems and their root causes will keep operations running smoothly, and prevent or reduce recurrences.
• Functional measures that are readily available, efficiently captured and repeatable.

To develop what Brandt calls “local excellence with global reach,” he recommends four areas of focus for manufacturers: Benchmarking, Restructuring, Improvement and Innovation.

Benchmarking. “Benchmarking has been around for a while,” he said. “We’re talking about it differently – not straight benchmarking, but taking a really hard look at how you manage the business and what the numbers are.”

Many companies have legacy systems where dozens of metrics are being tracked because someone asked for them at some point and none of them were ever eliminated. Tracking and managing 75 or 100 metrics isn’t very useful. “You want 15 or 20, or lower,” he said.

Brandt recommends looking at the metrics to eliminate some and see how the others are being tracked, since many firms tend not to look at their numbers from year to year. Then figure out how the metrics can be effectively shared with the employees who are on the front lines, making daily decisions that affect the business.

Restructuring. To be globally competitive, companies need to break down the tasks they perform to come up with a list of functions that are necessary for effective manufacturing. “Which ones are you really good at? Can you be good at all of them?” Brandt said.

Often he sees companies farming out functions before a thorough analysis has been done. Each function should be examined so that margins and costs can be determined. “Some firms that have outsourced customer service have problems with people in that role who don’t care,” he said. But some tasks, such as logistics or distribution, may be better performed by people who are experts in those areas.

Improvement. The research Brandt has done shows that companies using any improvement method do better than companies with no method. “It seems that, whichever method you pick, it’s more important to grab that and go through to the end, versus choosing one method over another,” he said.

Innovation. Most people still think of innovation as coming up with “some crazy new technology no one’s ever heard of before,” said Brandt. While that is part of it, it’s also about innovation in processes and discovering what customers really want.

“Within manufacturing, the customer is defining value a lot more broadly, outside the product,” he said. “What wraps around the product is where a lot of innovation can happen.”

For example, Lexus is known for their luxury cars, but they’ve changed the service process by sending out someone to pick up the car for service. “They’ve eliminated car maintenance as a time waster,” Brandt said. “They charge a lot for it, but for their target market, they’ve decided they’re more worried about time than money. Increasingly, people want to know, ‘What do you do besides just make a great product? How do you make my life easier?’”

Innovation also needs support from management, who need to be willing to give time and money to work on a new idea. This can be at odds with efforts to increase efficiency. “You have to figure out how to balance those two,” he said.

Beyond these four areas, Brandt stressed that leadership remains as important as ever, noting that good leadership can be identified by its absence. More and more, good leadership is tied to good hiring decisions, because “we haven’t seen an effective business model that isn’t decentralized, where employees have greater decision-making ability,” he said. Employees need to be as smart as possible, both technically and in terms of interpersonal skills, so that they can work as part of a team. Once the team is in place, “get out of the way,” said Brandt. “That’s hard for a lot of people to do.”

The long-term outlook for U.S. manufacturing is inescapably tied to globalization. “That’s good for the future, good for us and good for the rest of the world,” said Brandt. The short-term impact, though, is difficult as job losses adversely affect the people laid off, their families and their communities.

The best action manufacturers can take during this time of change is to “focus on the future – what kind of jobs do we want to have? What are the things that build wealth and build strong communities?” said Brandt. “Employees, managers and executives have to ask, ‘How can we be globally competitive right now?’”

U.S. manufacturers can be more competitive, “but they can’t operate as they did 30 years ago,” he said. “Remember where most of the value is created – new products and innovation. The more manufacturers can emphasize R&D, new product development, new techniques and more efficient processes, the greater value for the customer. The more they can do that, the better off they are.”