Special Report: ENTERPRISE: Technology: NETWORKING
A CUTTING-EDGE STRATEGY CALLED SHARING
Thousands of small manufacturers are skating on ever thinner ice. Most earn their keep by producing parts for large suppliers who, in turn, serve masters such as the Big Three or the Pentagon. But the Boeings, Chryslers, and TRWs of the world no longer want to bother buying parts from a score of suppliers to build, say, a car seat. To assure quality and to speed products to market quickly, they want one company to take responsibility for the whole thing--or at least major elements of it. For a company with 10 or 15 employees, that can be asking for the moon.
So fiercely independent small manufacturers are being forced to learn a new skill: cooperation. And they'll soon have to pick up another: electronic data interchange.
EDI involves linking companies together electronically so their computers can automatically handle many business chores, from dealing with purchase orders to exchanging engineering blueprints. The system is particularly critical today, when all facets of product development, from design to final assembly planning, happen simultaneously and in different locations. EDI will soon be simply the opening ante to get in the game with major manufacturers in such industries as aerospace, autos, clothing, and electronics.
TALENT POOL. As often happens, EDI is a case where companies picking up new technology skills will have to rethink the way they work. Hundreds of small manufacturers in the U.S. and abroad are doing just that. They are learning to think as one by joining flexible manufacturing networks. And their experiences suggest ways that non-manufacturers may need to evolve in the future, too. The members of these mini-consortiums pool talents for jobs too big for any one of them to tackle. The idea of cooperating or even sharing information with once and future competitors is not a comfortable concept. That's one reason why flexible manufacturing groups are so reluctant to let go of familiar technology, such as express delivery and fax machines.
Going digital would reap many benefits. Small companies could then connect to a shared database and instantly coordinate production schedules and blueprint revisions, which would help the group move more swiftly to win and fulfill contracts. The flexible manufacturing alliances can easily organize smaller teams for certain contracts that last only as long as it takes to get a specific job done. If all this sounds like the much-ballyhooed notion of the "virtual corporation," it is.
While such a concept may seem foreign to most executives in the job-shop business, others are quick to spot a parallel. "We thought we were a flexible manufacturing group until someone told us we were really a virtual corporation," says Robert E. Steele, chief operating officer of POSItech Manufacturing Group, an alliance of nine small companies in West Virginia. "And it's true. We've become a virtually large company. But instead of farming out work to internal departments, we farm it to our member companies."
The results speak for themselves. This year, Steele's group has collectively bid on contracts worth $300,000--and won $200,000 in business that no member would have gone after individually. For example, a six-company team recently shipped 12,000 tank-tread parts. Producing them was "beyond the ken of any one company," says Steele, "and we have two open contracts for more."
Currently, only the lead company, POSItech International in Wheeling, where Steele heads the Aviation Div., has a computer system that can swap EDI data with its customers. But Steele is urging the rest of the group to install EDI systems, since that would eliminate a major source of errors: manually translating the engineering data on faxed blueprints into the digital language of computer-controlled machine tools.
Moving to EDI will soon be necessary to bring POSItech and similar groups into compliance with orders from the Pentagon and major manufacturers. The Defense Dept. says it will require electronic interchange as soon as 1997 for contracts of less than $100,000. And by 2005, EDI could be mandatory for all federal purchases. The National Institute of Standards & Technology, the International Standards Organization in Geneva, and several industry groups have defined the uniform formats needed for such electronic commerce, and the Pentagon is funding a nationwide effort called CALS. That used to stand for Computer-aided Acquisitions & Logistics Support but now means Continuous Acquisition & Life-cycle Support. Whatever the name, the program provides advice and resources in getting EDI going .
Considering the potential benefits, EDI is not very expensive. Setting up a system--including a computer, modem, software, and certification of compliance with EDI standards--can cost as little as $3,000 to $5,000. Communications charges via a special EDI network vary with volume, but might run $150 a month for a small company.
ITALIAN IMPORT. The idea of collaborations among manufacturing companies first wafted into the U.S. 10 years ago from northern Italy. There, legions of tiny, cottage-industry companies belong to multiple support networks. The 25,000 mini-companies in Italy's Emilia-Romagna region, for example, support hundreds of flexible manufacturing networks. The advent of these "flexnets" in the late 1970s has been a boon for exports and a tonic for the local economy. By 1985, the region had Italy's second-highest per capita income, up from No.17 a decade earlier.
Some 250 manufacturing co-ops-- most prime candidates for EDI--are now scattered across the U.S. Perhaps twice as many are being planned, according to USNet, a Chapel Hill (N.C.) organization that assists state agencies in creating flexnets. Erie, Pa., is home to a close cousin of POSItech, the EBC Industries network. Like the POSItech group, there's a lead company, EBC Industries Inc., that has surrounded itself with a dozen local machine shops that have complementary talents in various aspects of metalworking. Since 1986, when EBC President Harry E. Brown took over the company, sales and employment have tripled, to $8.2 million and 80 workers. "A good deal of that has come from networking," says Brown. "And right now, we're about two steps from EDI."
This company-centric model is not the rule. But flexnets come in so many styles and flavors it's hard to tell just what the norm is. They span the industrial waterfront, from bookbinding and dressmaking to fishing and logging. A few groups have 100 members or more, but most have 5 to 15. The atmosphere can be autocratic or participative. Sales and service may be handled jointly by the companies' existing staffs, or centrally by someone who works full-time for the group--or even by independent reps. Probably the one safe bet with flexnets is that a local chapter of the National Tooling & Machining Assn. helped get things rolling.
It was the NTMA, for example, that provided some seed money in Wichita for Kansas Manufacturers Inc. Of the 20-odd job shops in this flexible manufacturing group, only one has annual sales of more than $4.5 million. Yet acting in concert, KMI recently snagged a $1.7 million order for auto parts from Sweden's Haldex Corp. In Athens, Ohio, ACEnet is helping 40 local food companies perfect processing methods and marketing techniques. The Columbus (Ind.) area is home to FlexCell Group: It has a core of 10 metalworking shops and, like the other cooperatives, is training its sights on EDI.
Seattle companies began assembling networks in the wake of defense downsizing and Boeing Co.'s outsourcing of more work to foreign suppliers. The Pacific Manufacturing Group, a collection of eight little job shops, was formed in 1992. PMG scored its first big win in late 1993: a $500,000 job for bulkhead doors in Navy ships. Since then, PMG has won a $300,000 follow-on contract, "and we hope to continue building more of these doors," says Lea E. Cole, the group's business manager. She's the point person who wins new business by selling PMG as a virtual company.
FALSE STARTS. Cole, a former procurement specialist at a customer of a PMG member, came on board last February. Since then, PMG has bid on contracts worth $1.3 million--and landed about 20% of that amount. "Lea is the reason we're beginning to really turn on this," says John A. Cournoyer, president of PMG and of Accurate Machining in Mukilteo, Wash. Earlier, there had been some false starts, he admits. At one point, several PMG members "just couldn't cooperate with competitors and share what they considered confidential information. Without trust," Cournoyer stresses, "you don't stand a chance." Now that the comfort level has risen, PMG is ready for the next step: It wants to move to EDI next year.
PMG could be just the beginning, if J. Paul Knox has his way. As a manager in Washington State's Community Development Dept., he helped PMG get off the ground with a two-year, $35,000 grant. The companies more than matched that, ponying up $50,000. So last year, Knox amassed a $650,000 kitty of federal, state, and private funds to begin creating PMG clones. In the works now are an Aerospace Alliance of 30-odd companies and a coalition of Puget Sound shipbuilders and repair firms. Washington has also joined USNet, the year-old consortium of 15 states aimed at creating the infrastructure to facilitate more networking.
USNet is run by Chapel Hill's Regional Technology Strategies Inc. and funded for three years with $2.7 million from the Pentagon's Technology Reinvestment Project and state membership fees of $25,000 a year. Originally, says USNet Director J. Trent Williams, "we had a heavy electronics orientation." He figured a lot of time would be devoted to promoting EDI systems and Internet access for flexnet members. But companies first had to learn the basics of working together, so USNet has so far been involved in helping define the essential baby steps.
USNet's electronics vision is about to take shape in Connecticut, however. The state-supported Flexible Manufacturing Networks Center (FMNC), based at Central Connecticut State University in New Britain, was to flip the switch in November on what may be America's first state-sponsored electronic-commerce system. It is designed to provide cut-rate EDI service for the state's five existing flexnets as well as seven more in the planning stage. Officials also hope to bring in dozens of Connecticut's 5,000 other small manufacturers, most of which depend heavily on defense business. "This EDI problem is one that's here right now," says FMNC Director Alan L. Kendrix. "Small manufacturers are being told by these large companies, either do it or we'll find someone else who will." In that environment, what small company wants to be the last to change?
When Competitors Collaborate
Small businesses are getting a big boost from flexible manufacturing networks, or alliances of several manufacturers who cooperate in winning and filling contracts. Here's a theoretical example of how such a network might produce a mousetrap:
ALICIA MUNROE IS BUSINESS MANAGER at Agile Production Team, a group of five small companies. She persuades NetTrapper to allow APT to bid on a $700,000 contract for hardwood mousetraps. Munroe analyzes the data on the product's rosewood base, the snapper spring, and the bait plate, matching the various parts to the expertise of APT members. She figures four members could make one or more parts: Accurate Metalbending, Autopiping, Wound Up Rolling, and Zeus Technology.
FROM HER HOME OFFICE, Munroe faxes the specifications to the four companies, inviting them to bid on individual parts. Autopiping comes in with the lowest price on the wood base. Zeus Technology beats out Wound Up for the snapper. Accurate Metalbending wins the bait plate. Munroe combines these quotes and sends off the APT bid.
APT WINS, AND MUNROE HANDS OUT the contract prizes to Zeus and Accurate Metalbending--and Autopiping, which also will handle final assembly and shipment of finished traps. The purchase orders include an added "tax" of 3% to help cover Munroe's expenses.
WHILE PRODUCING THE PLATES for trap No. 2,854, Zeus's machinery goes haywire. Munroe gets a frantic call for help. In such emergencies, APT's members have agreed to take up the slack at the winner's price. Wound Up steps in.
AFTER APT DELIVERS THE LAST TRAP, meeting all quality targets, NetTrapper rewards APT with a follow-on contract worth $250,000.
For More Information...
Here are some selected sources on flexible manufacturing networks and electronic data interchange (EDI).
CONCEPT OF OPERATIONS DOCUMENT This how-to manual for small companies thinking about forming a flexible manufacturing network will soon be available from the West Virginia High Technology Consortium Foundation in Fairmont, W. Va. (304 366-2577). The manual will include sections on legal issues, organizational structure, and EDI. Cost: Mailing fee only.
THE WHY EDI GUIDE FOR SMALL AND MEDIUM-SIZE ENTERPRISES looks at the experiences of 127 small companies from around the world, with in-depth case histories on 12 of them. Published by EDI World Institute in Montreal. Phone 514 288-3555; fax 514 288-4199; E-mail email@example.com. Cost: $30.
DATA INTERCHANGE STANDARDS ASSN. in Alexandria, Va. (703 548-7005). DISA's World Wide Web address on the Internet is http://www.disa.org/.
EDI WORLD INSTITUTE in Montreal (514 288-3555). Internet Web address: http://www.ediwi.ca/ediwi/.
ELECTRONIC COMMERCE RESOURCE CENTERS (ECRSs, formerly known as CALS Resource Centers) in California, Georgia, Ohio, Pennsylvania, Texas, Virginia, and Washington State. Administered and funded by the Pentagon's Advanced Research Project Agency (703 681-3490). ECRCs have industry experts on call. Details are on the World Wide Web at http://www.ecrc.ctc.com/.
NATIONAL INSTITUTE OF STANDARDS & TECHNOLOGY (NIST) in Gaithersburg, Md. (301 975-5020). NIST's Manufacturing Extension Partnership (MEP) program has field offices across the U.S. Web pages: http://www.nist.gov/ and http://www.mep.nist.gov/.
NATIONAL TOOLING & MACHINING ASSN. in Fort Washington, Md. (301 248-6200).
USNET in Chapel Hill, N.C. (919 933-6699) is working with government agencies, universities, and industry groups in 15 states to foster manufacturing collaborations and EDI.
BUSINESS WEEK ONLINE
To exchange information with other small-business owners or get updated sources of help, check out the Small Business Center in Business Week Online, available through America Online.
BUSINESS WEEK editors will host a live online conference on this subject on Thursday, Nov. 16 at 8 p.m. EST.By Otis Port in New York