Rebuilding the Supply Chain - Part 1: How Did We Get Here?
Category: Manufacturing Technology • May 19, 2020
By Chuck Schroeder, IMTS Media Representative/Owner – Insight Marketing
To find the way forward, learn from the past.
For 40 years, American industries, institutions, and organizations collectively kicked the can down the road. COVID-19 forced an intervention when fragile, over-extended supply chains broke. Our inability to domestically supply critical items, from N95 masks to circuit boards for ventilators, has forced our collective conscious to admit the truth. America has acknowledged it needs to re-think its manufacturing strategies—and indeed rethink its national priorities.
Some of the solutions to our current challenges can be found by examining how we arrived at this moment. At all times, please remember the ultimate goal: fix the problem, not the blame.
A History of Manufacturing
Anyone over 50 recalls a time when the U.S. Machine Tool industry was the heart of the world’s industrial base. Following WWII, nearly four in 10 Americans worked in manufacturing and made 55 percent of the world’s goods. While the percentage slowly declined following the war effort, the industry remained robust, reaching a peak total employment of 19.5 million in June 1979.
Since the start of the industrial revolution, America made the machines that made the equipment that made industry hum. The automotive, aerospace, petrochemical, appliance, primary metals, “high tech,” and military sectors were particularly strong. Machine tool firms were community pillars and household names, such as Bridgeport, Cincinnati, Gleason, Giddings & Lewis, Hardinge, Ingersoll, Kennametal, Kearney & Trecker, Pratt & Whitney, and more. Coupled with the job shops and OEMs that used machine tools, these companies provided the jobs that enabled generations to buy houses, cars, and appliances, all of which were designed and made in America.
The way forward is not necessarily to regain past glory, but to identify our future strengths. Executive Order 13806, Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States, was a DoD report delivered in October 2018. Perhaps it should be required reading for anyone in the industry.
The Perfect Storm
Beginning in 1981, a confluence of factors created a precipitous decline in the machine tool and manufacturing industries. It started when the Federal Reserve triggered the 1981-1982 recession with tight monetary supply (in an effort to reduce inflation) that caused interest rates to approach 20 percent (source) and unemployment to exceed 11 percent. Although goods producers accounted for only 30 percent of total employment at the time, they suffered 90 percent of job losses in 1982. Three-fourths of all job losses in the goods-producing sector were in manufacturing. The residential construction industry and auto manufacturers also declined, ending the year with 22 percent and 24 percent unemployment, respectively (source).
The Fed also emphasized a strong dollar policy. While a strong dollar helps U.S. consumers with lower prices on foreign goods, it makes it harder for U.S. producers to compete in domestic and foreign markets. In the 1980s, Japan enjoyed an approximate 30 percent cost advantage over U.S. producers, further eroding machine tool and durable goods sales.
Additionally, by the 1980s, European countries had instituted a Value-Added Tax (VAT) ranging from 15 to 25 percent (and now Asian countries have followed suit). U.S. manufacturers selling abroad consider a VAT as a trade barrier, as the importer incurs VAT on the entire value of the product, turning it into an implicit tariff on U.S. goods. Foreign product exported to the U.S. received a VAT credit but paid no VAT here, unlike in almost all other countries.
Losing Our Way
The U.S. machine tool industry created its own problems, starting with over-capacity and long delivery times (often more than a year) that coincided with the decline of its key markets. As a result of sales losses, they found it difficult to invest in new technologies and product development in the 1980s, just as the growth of microprocessors enabled CNC technology to expand.
Compounding the issue, Japanese and German firms captured the lead in both product technologies (through reliable, relatively inexpensive controls) and process technology (through modular production) that enabled them to establish a substantial productivity lead. As a result, companies such as Yamazaki Mazak Corporation, Okuma, and Toyoda gained a first-mover advantage in the CNC market and remain among the industry’s premiere companies.
Because of its highly cyclical nature, the machine tool industry has historically struggled to obtain capital, as have many small manufacturers. Growth and R&D investment have been largely self-financed, placing U.S. companies at a disadvantage compared to foreign competitors that benefit from sustained government incentives. Foreign governments also better connect research institutions, academia, and industry to incubate ideas, and their smaller companies also collaborate better.
Just as microprocessors and CNCs started a new era 50 years ago, digital manufacturing technologies are transforming the future of U.S. manufacturing. The concept of “machine tool” as a core technology has shifted to encompass the entire digital manufacturing ecosystem.
A PR Problem
For much of its history, America respected blue collar careers. However, as white-collar jobs increased in the 1970 and 1980s, misperceptions of manufacturing employment grew. When the recession forced schools to cut budgets, “shop class” hit the chopping block first, followed by music, art, and other “non-essential” courses. Students who liked to work with their hands instead of sitting behind a desk no longer had productive means to express their skills with metal, wood, cars, diesel mechanics, drafting, or cooking. Guidance counselors focused on filling the college pipeline instead of adapting to meet the needs of students and industry.
Nick Pinchuk, chairman, president and CEO of Snap-on, noted in an interview with CNBC that the manufacturing industry has “a PR problem” because people view jobs as welders and mechanics as the consolation jobs of our society. “These jobs are not a consolation prize,” he says, “they require technical skill and training.”
In addition, people forget that a skilled trade education is only the first phase of a career. For those with an entrepreneurial spirit, they are the basis for millions of essential small businesses, from auto body shops to bakeries to welding supply firms. As we enter a digital manufacturing era, the list of jobs requiring a technical education (but not a four-year degree) continues to grow.
To bring manufacturing back home, we need a skilled workforce using advanced technology. Fortunately, the nature of fourth industrial revolution jobs makes STEM careers more attractive, and German-style apprenticeship programs offer a model for career progression. Coupled with the over-inflated cost of four-year degrees with limited career potential, look for a STEM resurgence.
We Have Met the Enemy, and It Is Us
The dot-com bubble (2000-2002) occurred at the same time China gained entry into the World Trade Organization, flooding the U.S. with cheap imports. From 1999 to 2011, U.S. manufacturing lost six million jobs (2.4 million of them to China) driven by motives of price-conscious consumers and corporate leaders.
Working class Americans of an earlier generation grew up with limited possessions. A closet might contain two pairs of pants, five shirts, two pairs of shoes, and a Sunday outfit. Things were built to last—how many readers inherited grandpa’s tools, or outdoor gear? Whether from shop class or a closer connection to manufacturing, more people recognized and appreciated quality craftsmanship.
As people became distanced from production and had more disposable income, America lost its connection to lasting quality and replaced it with a dollar-store mentality. The U.S. consumer became entranced with the lowest priced product that was anywhere near an acceptable level of quality. Our fixation shuttered main street shops and gave rise to the big box interstate stores—which now themselves have been shuttered by online shopping.
While consumers blithely shopped on, corporations fed their appetite for cheap foreign products. MBA’s with a mission to lower piece-price and a back pocket stuffed with stock options shipped manufacturing overseas. Entire industry sectors decided that their best business strategy was to outsource production (followed by IT and service), essentially becoming brand managers with a staff of designers and engineers disconnected from the reality of manufacturing processes. As long as Americans desire low-cost, low-value items, no one seriously thought all manufacturing should return to the Western Hemisphere.
However, COVID-19 has exposed the risks of global sourcing decisions driven by short-term gains. We lack self-sufficiency to produce castings for machine tool bases, the controls/motors/drives for the machine tools, and a plethora of electronics. We are also dependent on foreign nations for essential raw materials, covering everything from non-woven textiles to active pharmaceutical ingredients to tungsten carbide for cutting tools.
While we all wish we could have arrived at the current pressure point by a different path, here we are. Corporate leaders are (or will soon) facing pressure to use new sourcing metrics, such as total cost of ownership, including supply chain resiliency, cyber security, and intellectual property protection. This is good news, as approximately 20-30 percent of manufacturing can and should —be brought back—and that’s without tariffs or domestic sourcing mandates, according to Harry Moser, founder of the Reshoring Initiative.
AMT & IMTS understand that rebuilding the supply chain requires rethinking your strategy, reengaging and connecting with new resources, and reestablishing a new program. Therefore, we are dedicating significant staff and financial resources to help you thru this process.
U.S. government policies matter. Individuals can let their representatives know they support legislation that improves the competitiveness of American companies and helps attract foreign investment in the U.S.