Supply Chain Innovation  Federal Style

Obama Administration Announces New Plan to Help Supply Chain

President Obama will be in Ohio today to talk about his administration’s “Supply Chain Innovation.” “Strengthening America’s supply chains and the small manufacturers at their core is essential to the long-term competitiveness of U.S. manufacturers both large and small,” according to new strategy by the Department of Commerce entitled Supply Chain Innovation: Strengthening America’s Small Manufacturers.”

Manufacturers spend on average 60% of the price of their final product on purchased inputs, so “differences in the quality and nimbleness of their supply chains can make or break a manufacturer’s ability to compete,” the report explains.

The concern with regard to the supply chain is that the networks of the country’s 230,000  small manufacturers, which have added a  majority of the new manufacturing jobs,  is under pressure due to lack of investment stemming from companies offshoring production.

To help remedy this the adminstration is offering a $320 million public-private MEP competition to expand services to small manufacturers. 

The competition will award nearly $32 million annually for five years across twelve states -- an expected total of $158 million matched dollar-for-dollar by $158 million or more of non-federal funding. 

Non-profits working with manufacturers in each of the twelve states will have the opportunity for cooperative agreements to operate MEP centers and expand the range of services offered. 

New MEP competitions are being launched in 12 states: Alaska, Idaho, Illinois, Minnesota, New Jersey, New York, Ohio, Oklahoma, Utah, Washington, West Virginia and Wisconsin. 

The reason for these new investments in highlighted in the report which discusses the issues the industry is facing. 

Small manufacturers face steep barriers to innovation – from invention, to commercialization, to the diffusion of new technology. For example, small manufacturers contribute less than one-third of all manufacturing R&D, despite making up 98% of manufacturing firms and as a general rule, small firms are one-seventh as likely as large firms to conduct R&D. As a result, small manufacturers are often in the positon of having to adopt technologies invented by others. Small manufacturers also face unique barriers in accessing the capital and expertise to take on the risk of new technologies. In part because of the challenges they face in adopting new technologies and processes, small manufacturers are only 60 percent as productive as large manufacturers.

Some practices to help firms promote supplier innovation, especially among small businesses in their supply chains include:

Offer suppliers assurance that they will receive a return on investments they make in new technologies and in upgrading their capabilities. Investments in new capabilities and technologies are inherently risky, especially for small suppliers with tight margins and limited access to capital. Informal assurance from larger partners that these investments are of sufficient value to receive a price premium and continued business can reduce the risk of the investment. And guidance from larger manufacturers about emerging manufacturing technologies, especially those that may require collaborative changes in design between supplier and lead manufacturer, can help suppliers identify those technologies that provide the greatest value.

Promote information-sharing and make changes in their own operations as a result of supplier suggestions. Communication with suppliers may reveal actions by lead firms that turn out to be costly for suppliers – costs that ultimately may be passed on to the buying firm. For example, large companies often undertake policies such as frequent schedule changes or late payments that impose far greater costs on their suppliers than they realize. Other firms may allow suppliers to speak only to purchasing agents, in an attempt to preserve their bargaining power. However, blocking communication with engineers may mean that they miss out on suppliers’ best ideas and joint problem-solving that would benefit both firms.

 Use a “Total Cost of Ownership” approach in making purchasing decisions. Innovation is greatly facilitated if lead firms choose suppliers not on the narrow basis of low piece prices, but instead use a “Total Cost of Ownership” (TCO) approach, which considers the many kinds of costs to the buyer associated with the acquisition, transportation, and storage of products within the supply chain. These costs include shipping costs, shipping time, storage costs and risk of damage or obsolescence of inventory, quality costs, travel costs for supplier oversight, currency fluctuations, intellectual property risk, financing costs, and risk of interruptions to the supply chain. Consideration of this broader set of costs encourages suppliers to innovate to find new ways to maximize value for the supply chain as a whole.

Other advice offered by the report is to have the public sector  build on private-sector efforts to act as a catalyst for technology acceleration to benefit the supply chain as a whole. Some initiatives currently underway include: 

The Hollings Manufacturing Extension Partnership (MEP), created in 1988 and part of the Commerce Department’s National Institute of Standards and Technology (NIST), was designed to overcome some of these challenges by providing small businesses access to management and technological expertise in 60 centers across the country. Every day, its more than 1,200 experts consult with manufacturers to help them improve their processes and identify opportunities to adopt new technologies or take new products to market. Today, over 30,000 manufacturers benefit from this expertise and network. Recognizing the growing importance of supply chains and realizing that stronger connections between firms can help small manufacturers upgrade their capabilities, the Manufacturing Extension Partnership is expanding the successful supply chain and technology acceleration services for small manufacturers piloted over the last few years.

The Department of Defense Office of Economic Adjustment (OEA) supports state and local governments in responding to changes in defense programs that affect communities, including base closures or expansions, and incompatibilities between military operations and local development. OEA’s Defense Industry Adjustment (DIA) program works with supply chains, seeking to help its customers improve their resiliency in their respective defense industrial bases. While DIA works to help dislocated workers and impacted firms adjust to demand shocks from changes in defense spending, another major component of the DIA program is helping communities understand the economic clusters that comprise their local, regional, or state defense industrial base. In addition, DIA helps these communities understand how their industrial base interacts with other states or regions. One recent DIA project is the Virginia DoD Procurement Economic Impact Evaluation Model. The model is a supply-chain mapping of DoD contract awards, including sales and employment impacts, available for public use. It provides state-, county-, and local level details about current and projected economic impacts of DoD contract spending. Similar projects are underway in Colorado, southern California, and New Jersey.

The Department of Energy (DoE) maintains 17 national labs in the United States. The labs engage in basic and applied technology R&D and provide a forum for the exchange of technology and ideas between regional firms, universities, and economic development intermediaries. The New Mexico Small Business Assistance (NMSBA) program helps small businesses in the area by providing access to experts at the local Los Alamos National Laboratory and Sandia National Laboratories. Technical assistance is funded by the state and provided to businesses free-of-charge, but access is competitive. To help small businesses compete for funding, the NMSBA created a national lab voucher program that since 2000 has helped over 1,000 small businesses gain access to the Los Alamos and Sandia labs. The state government provides the funding for the vouchers through a partnership with the NMSBA. Ten projects developed by small businesses in New Mexico leveraging technical expertise and assistance provided by the Los Alamos and Sandia labs were recognized in 2012 for their innovation. Technologies of Santa Fe, a small manufacturer, worked with the labs to develop a solar thermal ice-making product to deliver life-saving vaccines throughout the world in storage containers that use solar energy to maintain low temperatures.

The SupplierPay Initiative, a partnership between the federal government and the private sector, has resulted in nearly 50 companies signing a pledge to improve payment terms to their suppliers. Because small suppliers are often subject to more stringent credit restraints than larger companies, they have difficulty securing working capital when buyers lengthen payment terms. This, in turn, passes costs back onto the buyers in the form of higher piece prices or reduced innovation. Faster payment terms free up working capital for small suppliers to use for investments in worker training or innovation. Many of these companies also play a prominent role in the American Supplier Initiative, often participating as corporate buyers in a series of nationwide events designed to engage small business suppliers in corporate supply chains.

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