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Surviving Supply Chain Integration: Strategies for Small Manufacturers

Surviving Supply Chain Integration: Strategies for Small Manufacturers

by Committee on Supply Chain Integration, Commission on Engineering and Technical Systems, National Research Council

The managed flow of goods and information from raw material to final sale also known as a "supply chain" affects everything—from the U.S. gross domestic product to where you can buy your jeans. The nature of a company's supply chain has a significant effect on its success or failure—as in the success of Dell Computer's make-to-order system and the failure


The managed flow of goods and information from raw material to final sale also known as a "supply chain" affects everything—from the U.S. gross domestic product to where you can buy your jeans. The nature of a company's supply chain has a significant effect on its success or failure—as in the success of Dell Computer's make-to-order system and the failure of General Motor's vertical integration during the 1998 United Auto Workers strike.

Supply Chain Integration looks at this crucial component of business at a time when product design, manufacture, and delivery are changing radically and globally. This book explores the benefits of continuously improving the relationship between the firm, its suppliers, and its customers to ensure the highest added value.

This book identifies the state-of-the-art developments that contribute to the success of vertical tiers of suppliers and relates these developments to the capabilities that small and medium-sized manufacturers must have to be viable participants in this system. Strategies for attaining these capabilities through manufacturing extension centers and other technical assistance providers at the national, state, and local level are suggested.

This book identifies action steps for small and medium-sized manufacturers—the "seed corn" of business start-up and development—to improve supply chain management. The book examines supply chain models from consultant firms, universities, manufacturers, and associations. Topics include the roles of suppliers and other supply chain participants, the rise of outsourcing, the importance of information management, the natural tension between buyer and seller, sources of assistance to small and medium-sized firms, and a host of other issues.

Supply Chain Integration will be of interest to industry policymakers, economists, researchers, business leaders, and forward-thinking executives.

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National Academies Press
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Strategies for Small Manufacturers


Copyright © 2000 National Academy of Sciences
All right reserved.

ISBN: 978-0-309-06878-9

Chapter One

Executive Summary

The business environment is changing rapidly and with it the supply chains of original equipment manufacturers (OEMs). Most OEMs no longer compete solely as autonomous corporations. They also compete as participants in integrated supply chains. In response to competitive pressures, U.S. manufacturers are purchasing increasing amounts of goods and services from outside suppliers (i.e., outsourcing), as well as integrating their supply chains to improve performance. A 1998 survey revealed that 80 percent of manufacturers had formal supply chain management programs or planned to start them in the next year. In this context, the National Institute of Standards and Technologies and the Robert C. Byrd Institute requested that the National Research Council conduct a study of the new roles and challenges faced by small and medium-sized manufacturing enterprises (SMEs) in integrated supply chains. The Committee on Supply Chain Integration was formed, under the auspices of the Board on Manufacturing and Engineering Design, for this purpose.


The committee was asked to perform the following specific tasks:

Identifyand analyze state-of-the-art supply chain integration concepts.

Define the requirements for successful participation by SMEs in integrated supply chains.

Identify the gaps between integrated supply chain requirements and the capabilities of SMEs.

Suggest strategies to assist SMEs in developing the capabilities required for successful participation.

This report is intended for the owners and managers of small and medium-sized manufacturing enterprises and for the manufacturing extension centers and technical resource providers (MEC/TRPs) that support them.


The estimated 330,000 SMEs in the United States have a substantial economic impact. Defined as having fewer than 500 employees, SMEs are important to the nation because they account for 98 percent of all manufacturing plants, employ two-thirds of the nation's 18 million manufacturing workers, generate more than half of the total value added in the manufacturing sector, and are the source of many innovations in technology.

SMEs typically provide capabilities that their larger customers do not have or cannot cost-effectively create, such as:

agility in responding to changes in technologies, markets, and trends

efficiency due, in part, to less bureaucracy initiative and entrepreneurial behavior on the part of employees resulting in higher levels of creativity and energy and a greater desire for success

access to specialized proprietary technologies, process capabilities, and expertise

shorter time-to-market because operations are small and focused

lower labor costs and less restrictive labor contracts

spreading the costs of specialized capabilities over larger production volumes by serving multiple customers

lower cost, customer focused, and customized services, including documentation, after-sales support, spare parts, recycling, and disposal


The committee defined a supply chain as an association of customers and suppliers who, working together yet in their own best interests, buy, convert, distribute, and sell goods and services among themselves resulting in the creation of a specific end product. A supply chain includes all of the capabilities and functions required to design, fabricate, distribute, sell, support, use, and recycle or dispose of a product. An integrated supply chain can be defined as an association of customers and suppliers who work together to optimize their collective performance in the creation, distribution, and support of an end product. The objective of integration is to focus and coordinate the relevant resources of each participant on the needs of the supply chain and to optimize the overall performance of the chain.


SMEs cannot ignore the supply chain revolution and remain competitive. Although the outsourcing trend is providing increased opportunities for suppliers, trends toward globalization and increased supply chain integration pose serious challenges. A comparison of the requirements of each OEM's supply chain with the unique capabilities of an SME and its own supply chains often reveals deficiencies or gaps the SME must address. Closing these gaps involves (1) eliminating or circumventing constraints, (2) obtaining appropriate capabilities to satisfy the unmet need, and (3) utilizing the capabilities in a timely and effective manner. Although each SME has its own definition of success, the committee defined successful supply chain participation in a manner similar to the traditional definition of business success (i.e., participation in which benefits to the participant exceed the costs).


Competitive cost, quality, service, and delivery are the traditional fundamental capabilities required of all suppliers, but successful participation in today's integrated supply chains requires more. Although these evolving fundamental capabilities are still the cornerstones of supply chain requirements, technology and management skills are increasingly critical for success.


Global markets are demanding products of higher quality, but high-quality products cannot be cost effectively assembled from low-quality components. Therefore, to remain competitive, OEMs are demanding higher quality products from their suppliers. Suppliers with quality deficiencies weaken the entire supply chain and, unless they improve, are being phased out. Quality is even more critical in supply chains using just-in-time manufacturing and low inventory levels because there are fewer buffers to protect against quality failures.

Thus, SMEs should not consider quality as only a requirement for continued supply chain participation, but as a strategic capability. SMEs that adopt quality as a competitive strategy find that they are better able to weather cyclical swings in their business and that their product costs are lower.

Recommendation. In response to the requirements of integrated supply chains for improved quality, small and medium-sized manufacturing enterprises should adopt quality as a competitive strategy and consider implementing additional techniques, such as six sigma, ISO certification, and statistical process controls, to comply with customer demands, improve overall business performance, and provide a common language for communication on quality issues.

Cost and Value

Costs have always been critical, and in the increasingly global economy it is not unusual for SMEs to find sudden gaps between their prices and the prices of competitors from low-cost areas. The convergence of improvements in high-speed communications, reductions in transportation costs, the widespread adoption of English as the language of business, and universal access to technology and effective management practices have enabled companies in areas with low labor costs to become competitive regardless of their location. Thus, SMEs must substantially reduce costs by using both traditional and innovative approaches, such as integrating their own supply chains.

Many SMEs will have to do more than provide low-cost parts if they want to become partners with demanding customers. They will also have to provide value-added services, such as low-cost storage, rapid response to warranty issues, ready access to spare parts, improved logistics, and increased design capabilities. Because their present customers may be unwilling to pay for added value, SMEs may have to reposition themselves into new industries and find customers that are willing to pay for value-added products and services.

Recommendation. Small and medium-sized manufacturing enterprises should rigorously reduce costs internally and throughout their supply chains. They should also seek ways to increase the value added to their products and services and find customers that are willing to reward such value.


With increased levels of supply chain integration and reduced inventory levels, reliable, on-time deliveries have become critical for success. Large inventories and production capacities were traditionally required to ensure on-time delivery. However, with advanced information systems, agile manufacturing organizations with flexible equipment and tooling, and sophisticated logistics systems, integrated supply chains no longer need large, costly inventory buffers to respond to unexpected events and variations in demand. These capabilities should be augmented by the effective use of advanced transportation capabilities, such as overnight delivery.

Recommendation. In response to increasing demands for rapid delivery and customized products, small and medium-sized manufacturing enterprises should consider using advanced supply chain communication systems, flexible manufacturing techniques, and modern transportation capabilities as alternatives to investing in large inventories and production capacities.

integrated supply chain is a complex task, and participation in multiple chains adds to the complexity. Rapid changes in the business environment, shorter product life cycles, and increasing customer demands require a robust management team that is willing and able to respond rapidly to changes.

Recommendation. Although extensive formal planning may not be justified, it is becoming imperative that small and medium-sized manufacturing enterprises periodically pause from the rush of daily business to survey the business environment of rapidly changing technologies and customer requirements and develop brief, formal business plans.

Recommendation. Small and medium-sized manufacturing enterprises should (1) assess and strengthen their management capabilities; (2) create a corporate environment conducive to the flexibility, change, evolving skills, and learning required by integrated supply chains; (3) integrate their own supply chains; (4) learn to deal effectively with risk; (5) develop the people skills required to integrate effectively with customer supply chains; and (6) engender a shift in corporate attitudes about supply chains from "what's in it for me" to "how can we maximize the common good." Because all of the requisite skills are rarely resident in a single entrepreneur, SMEs should, whenever possible, increase the breadth and depth of their management teams.


Technology is playing an increasingly significant role in the success or failure of SMEs. Although up-to-date manufacturing and process technologies are critical, they are no longer the only required technologies. Information technology has become a key to operating success. Internet technologies alone are changing the mechanisms of communication, marketing, selling, buying, and generating revenue.

Recommendation. Small and medium-sized manufacturing enterprises (SMEs) should keep abreast of customer expectations regarding on-line responsiveness and use e-business service providers to assist them in creating and operating low-cost Web sites for displaying products, accepting orders, and answering frequently asked questions. SMEs without an on-line presence may find themselves at a strong competitive disadvantage.

Recommendation. Although the highest levels of communication capabilities can provide incredible competitive power, they are too complex and costly for most small and medium-sized manufacturing enterprises (SMEs). These technologies should be monitored closely, however, because their costs and ease of implementation are improving dramatically. Internet technologies can provide many of these capabilities today at far lower cost, and SMEs should take advantage of these easy-to-use technologies.

Recommendation. Despite significant media coverage of the capabilities of business management systems, small and medium-sized manufacturing enterprises should evaluate, but generally defer, purchasing enterprise resource planning and supply chain integration software until prices come down, these systems are easier to install and use, and the benefits of specific systems have been more thoroughly validated.

Recommendation. Regardless of the level of integration, senior management in small and medium-sized manufacturing enterprises should take the lead in using Internet technologies within their companies. They should closely monitor changes in information technology and invest now in basic capabilities, plan for future investments to support their competitive position, and study how and when to integrate their systems with those of other supply chain participants. Senior management should define data requirements and closely manage the implementation of appropriate data management and electronic communication capabilities.

Recommendation. Despite the increasing importance and glamour of Internet-based technologies, small and medium-sized manufacturing enterprises should not ignore up-to-date manufacturing and process technologies. They remain essential for success.

Recommendation. As supply chain integration requirements and the need for new technologies increase the financial requirements imposed on small and medium-sized manufacturing enterprises, they should integrate their own supply chains to reduce redundant inventories and excess manufacturing capacities, thereby freeing cash for other investments.


Based on interviews conducted for this study and the experience of committee members, successful SMEs tend to:

choose customers carefully

react appropriately to salient events that can define success or failure

establish strategic alliances and partnerships with customers and suppliers

cater to customers' needs

focus on quality

treat employees as valuable assets

select and monitor appropriate metrics

document business and manufacturing processes

use the Internet for business communications and education

share information with supply chain partners


Excerpted from SURVIVING SUPPLY CHAIN INTEGRATION Copyright © 2000 by National Academy of Sciences. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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