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While the United States still leads world in innovation, American manufacturers are faced with doing more with less to compete in the global economy.  They must achieve higher productivity with fewer people and lower profits.  What can manufacturers do to survive, succeed and thrive in the intense global economy?

There are hundreds of books and articles with recommendations on how manufacturers can succeed and grow in the global economy.  Innovative strategies are key to success.  Let’s focus on the following three strategies:  purpose, process, and promotion.

Purpose – a clear vision of the reason for the existence of your company, an understanding of the need you are looking to fulfill and the solution, the Distinct Competitive Advantage (DCA) of company’s products or services, the target audience you are serving, and the internal business model and guiding principles of the company.

Process – adoption of Lean Manufacturing and Six Sigma principles that seek to eliminate waste through all aspects of the organization and process and focus on the production and delivery of products directly associated with customer orders.

Promotion  – use of most cost-effective and productive marketing and sales methods and channels to market

According to Michael Treacy’s book, “The Discipline of Market Leaders,” best in class companies must choose one of the three following types in order to be able to fully optimize key company support systems:

1. Process Excellence Company – companies like McDonalds make their processes very efficient and consistent to survive or thrive.
2. Innovative Leader Company (product leadership) – companies like Apple create innovative products like the iPhone and iPOD at a much faster rate than their competition in order to survive or thrive
3. Customer Intimacy Company – companies that focus on being flexible to cultivate long time relationships with customers

How well a company performs, or even survives, depends upon how that company focuses on meeting the markets to which it is trying to sell.  As a manufacturers’ sales representative for over 25 years, I know how important marketing is to the growth and success of a company.  Businesses cannot succeed if they don’t meet the needs of the market.  Manufacturers often fail because they embrace a product-driven strategy instead of a market-driven strategy.  There’s an old story that if you build a better mousetrap, the world will beat a path to your door.  This isn’t true!  You first have to let the world know you have built a better mousetrap through marketing, and you have to make the product easily available to them through the right sales channels.

Most small to medium-sized manufacturers don’t put enough emphasis on marketing because they don’t really understand what marketing is and don’t have any marketing experience.  Most small to medium-sized companies can’t afford to have a marketing or sales manager.  The owner of the company tries to do sales at the same time he/she is managing the day-to-day activities of the company.

So what is marketing?  It is everything a business does to create customers for their product/services.  Everyone in the company is part of marketing, and marketing begins in the mind of customer.  A business should never stop marketing.  What’s in it For Me (WIFM) is a universal law of marketing.   There are no marketing rules that apply to every type of company, and there are no quick fixes or “magic pill” that will work for every company.  All marketing is a gamble – you can’t accurately predict the results.  There are three basic steps to effective marketing

• Know your market
• Know each possible way to reach market with persuasive message
• Use methods that provide maximum results with minimum effort

Every company needs to address these three areas in some way, but any given company will need to focus on one or more of these methods in order to survive or thrive.   As Brian Tracy’s said in his book “The Discipline of Market Leaders” “No company can succeed today by trying to be all things to all people.”

You and your sales team need to be able to describe what it is about your product or service that is unique or different.  This is called your Differential or Unique Competitive Advantage (DCA).  In other words, the reasons why customers would want to buy or use your products or service.

You need to be able to describe your “business identity” in 25 words or less (called an  “Elevator speech”).   For example, my business is ElectroFab Sales, a manufacturers’ sales rep agency, and my business identity elevator speech is:  “We help companies select the right manufacturing processes to make parts for their products from the companies we represent.”  The key is to find a market in which your product and/or service can be a leader.

An effective DCA always develops out of an under filled or unfulfilled market need.  Examples of DCA thrusts are:

• Cutting edge technology
• Fills wide range of needs
• Specialized know-how
• Wide selection
• Exclusive selection
• Customization
• Convenience
• Speed (of service or product delivery)
• On-going customer education
• Service follow-up

If you are having trouble determining the DCA for your business, ask your customers questions about what they like best about you company’s products and/or services.  Ask them what they look for in a vendor/supplier and how they decide which company to choose.   Compare your products or services with those of your major competitors.   It would be helpful to have a consultant or someone outside of your company do a comparative matrix of your products or services.

If you still can’t determine your company’s DCA, you would be wise to hire a marketing consultant to help you identify what is unique about your company and its products and/or services.  You may even need help restructuring your company or redesigning your products to create a competitive advantage.  If you do not have a competitive advantage your sales people can easily describe, you are dead.

Once you have an accurate understanding of your target markets and have determined your DCA, then you can choose the best marketing methods to use.  The following are some of the best low-cost marketing methods:

• Direct Mail Marketing  – flyers, letters, brochures, catalogs, CDs/DVDs
• Internet Marketing (website, e brochures, e newsletters, videos, webinars)
• Distributors
• Sales Representatives
• Strategic Partnerships – non-competing companies promote each other for percent of the action
• Social networking (Linkedin, Facebook, Twitter)
• Telemarketing
• Trade Shows

The direct mail marketing methods of flyers, letters, brochures, and catalogs don’t work as well as they once did, and people don’t often take the time to view the newer CDs and DVDs.  A two to four minute video on a website has become more effective.

An Internet presence via a website has become crucial way to establish credibility as a company.  I am surprised I still meet entrepreneurs that don’t have a website and have a gmail mail or yahoo email address instead of one connected to a company website.  It’s well worth the money to have a website, even for very small companies or professional consultants.  Electronic brochures and newsletters can become effective tools to use if they are concise, easy to read, and contain useful information.  Even though attendance at trade shows has dropped in the last few years, there is no substitute for the opportunity to meet face-to-face with a prospective customer and have them see and touch your products or even see a live demonstration of how it works.  Telemarketing is most effective when it is used to make “warm” calls to follow up on show leads or keep in regular contact with regular customers and key prospects.  If you don’t have any idea how to utilize social networking for your company, there is an abundance of training available now to fit everyone’s schedule.

Today’s manufacturers must utilize innovative strategies to succeed and grow.  The days are gone when manufacturers could have equipment and people sitting idle.  American companies who provide the level of delivery, or quality, or customer service that got them by in the past will not survive, because customers can get that from Chinese vendors for a far lower price.  American manufactures are now in a struggle for their very survival.  The strategies covered in this article are based on an excerpt of the chapter in my book, Can American Manufacturing be Saved?  Why we should and how we can, on what manufacturers can do to not only “save themselves,” but also prosper and grow in the competitive global economy.

Michele Nash-Hoff is President of ElectroFab Sales and can be reached at michele@savingusmanufacturing.com

The America Invents Act (S. 23), originally titled the Patent Reform Act of 2011, passed the Senate by a vote of 95 to five.  The bill’s author was Judiciary Committee Chairman Patrick Leahy (D-Vt.), and Chuck Grassley (Iowa) the Ranking Republican on the Judiciary Committee, and Orrin Hatch (R-Utah) were original co-sponsors of the bill.  An amendment to strip S. 23 of its troubling grace-period provision by striking the section of the bill containing the conversion of America’s first to invent patent priority system to a first to file patent system introduced by Sen. Diane Feinstein (D-Calif.) was defeated 87-13.

The first to file (FTF) provision eliminates the current first to invent filing system that goes back to the earliest beginnings of our nation.  The FTF transition would eliminate the current one-year grace period that allows inventors to prove they were first to invent within one year from the date of their invention. Retaining the current grace period and filing system received little attention as small inventors were largely left out of the previous Congressional hearings on patent reform in 2009 and 2010, and no hearings were held by the Judiciary Committee of the new Congress prior to vote on the Senate floor.

According to Patent and Trademark Office Director, David Kappos, the U. S. is already operating as a “first to file” patent system because in 2007, the total number of interference cases for all applications was seven, and only one interference claim involving a small or medium sized entity was decided based on priority alone – out of 441,637 patent granting decisions.  Interference cases are where two inventors file their patents nearly simultaneously and rely on the first to invent criteria during interference proceedings.

“Reforming the nation’s antiquated patent system will promote American innovation, create American jobs.  It will grow our economy,” Leahy said on the Senate floor.  President Obama praised the Senate action, saying “This long-overdue reform is vital to our ongoing efforts to modernize America’s patent laws and reduce the backlog of 700,000 patent applications – which won’t just increase transparency and certainty for inventors, entrepreneurs and businesses, but help grow our economy and create good jobs.”

The bill allows the Patent and Trademark Office (PTO) to determine fees and stops the practice of Congress diverting patent fees to the general Treasury to ensure that the office has the resources to hire more qualified examiners and modernize its computer systems.  Like a thief in the night, Congress raided the PTO fund and diverted $53 million of fees to other Congressional programs.  The new Congress hasn’t made any attempt to refund that amount to the PTO.  PTO funding is completely dependent on user fees paid to the PTO for patent and trademark applications, examinations, and maintenance.  Zero taxpayer dollars are used to fund the PTO, which means Congress is using resources paid by inventors and innovators on programs not related to the patent or trademark applications those inventors and innovators filed.  In addition to the $53 million stolen last year, over $750 million was stolen by Congress over the last 15 years.  (CONNECT Policy eNews 1.31.11)

When Director Kappos was in San Diego in May 2010, he told the San Diego Inventors Forum that they were hiring 300 more patent examiners in 2010 and planned to hire 1,000 more in the next two years to help reduce the backlog of 750,000 patent applications.  He said they were also providing training to the current 7,000 patent examiners to accelerate the processing of patent applications.

The bill creates a new micro-entity category that would allow fees to be reduced by 75 percent for inventors with five or fewer employees and fewer than five prior patent applications.  The PTO currently offers a 50 percent discount for small entities (under 500 employees) in virtually every fee category, which is further reduced by another 50 percent for small entities and independent inventors who use the electronic filing system.

Under the bill, the PTO could set up an expedited review program under which, for a higher fee, it would guarantee a final decision on an application within a year.  It now takes about three years, on average, for a patent application to be approved, and the office has such a backlog that it takes two years for examiners to begin work on a new application.

The legislation garnered a broad spectrum of support from pharmaceutical companies, large corporations such as IBM and Motorola, academic groups such as the Association of American Universities, and labor groups, including the AFL-CIO.  The Coalition for 21^st Century Patent Reform, a group whose 50 members includes Caterpillar, General Electric, Eli Lilly, and Procter & Gamble, said “this legislation will make our national more competitive in the global marketplace.”

Independent inventors (individuals who are not part of corporations) had been anxiously watching the outcome of the proposed Patent Reform Acts of 2009 and 2010, in which the new process would be a first to file system in contrast to the current first to invent system.  The concern of independent inventors was that this bill would favor large companies who can afford to file applications for patents before vetting the new technology because it would alter patent law to effectively kill the grace period by conditioning it on early disclosure.  In other words, an inventor would have to publicly disclose the invention in order to trigger a grace period.  Startups and small business inventors do not publicly disclose the details of their inventions right after they are conceived because it would tip off competitors to essential details of their new technology.   The ability to secure a patent is critical for an inventor or startup company to be able to obtain licensing agreements or early stage investment funding by angel investors or venture capitalists.

Several groups representing inventors and small business have long campaigned against any provision that would weaken the legal mechanisms available to their members to assert their patents.   In December 2009, a group of organizations announced that they banded together to form the Small Business Coalition on Patent Legislation.  The Coalition is a national consortium of non-profit organizations representing and assisting early-stage startup companies, small businesses, individual and academic inventors, researchers, and new innovative market entrants who depend on patent protection.  The Coalition included San Diego’s CONNECT organization, the National Small Business Association (NSBA), IP Advocate, the American Innovators for Patent Reform (APIR), the National Association of Patent Practitioners (NAPP), the Professional Inventors Alliance USA (PIAUSA), and the United Inventors Association (UIA)

Ed Black, president and CEO of the Computer and Communications Industry Association, a trade group whose members include Google, Microsoft and Oracle, warned that excluding the post-grant review provisions could make “the current situation even worse for the tech industry.”  Sen. Mark Udall (D-Col.) one of the co-sponsors of the amendment said he would seek to include it in the final version of the bill negotiated by the reconciliation committee with the House bill that passes.

The Coalition for Patent Fairness, which represents high-tech companies, such as Apple, Google, Intel, Cisco, and Oracle had been a leading voice of dissent on the legislation and announced they would continue to work with Congress to address the concerns of America’s top innovators.

When the bill was first introduced by the new Congress in January, Timothy Tardibono, CONNECT’S Washington D.C. Office Director said, “The bill makes it harder for inventors to perfect their invention before filing while ignoring a major Supreme Court case that will further exacerbate the patent application backlog and pendency time.  There is no need to rush this bill through until it fully protects innovation instead of hurting innovation and killing job creation.”  This legislation he mentioned is Microsoft v. i4i patent infringement case, in which Microsoft is petitioning the U. S. Supreme Court to lower the standard needed to prove a patent invalid from the current standard of clean and convincing to preponderance of the evidence.

In a February 2, 2011opinion article in The Hill’s Congress Blog, U. S. business & Industry Council President, Kevin Kearns, and Research Fellow, Alan Tonelson, wrote, “The principal advocates of the Leahy bill are the governments of Europe and Japan – along with boosters in China and India.  They want the United States to ‘harmonize down’ to their inferior systems.  They and the bill have it backwards.  Advocates also include a handful of Big Tech transnational corporations that want to make easier and less costly the infringement of other’s patent rights.  Their business model has a unique name, ‘efficient infringement.’”

They also pointed out that the reforms of the Clinton era “doubled from 18 to 36 months the time required to process a patent, required the Patent Office to publish full patent applications on the Internet 18 months after filing – encouraging theft of American IP worldwide, and created a new post-grant challenge process to patent validity that can consume three or more years in bureaucratic proceedings inside the Patent Office.  As a result, individual inventors who received 15 percent or more of all U. S. patents before the Clinton reforms got barely 5 percent last year.”

The action now moves to the House, where Judiciary Committee Chairman Lamar Smith (R-Texas) has indicated that he plans to introduce a companion bill in the near future..

As a member of the steering committee of the San Diego Inventors Forum, I stand on the side of the individual inventor and small business owner and oppose the conversion to the first to file system.  Each month, our meeting is packed with 60 to 80 inventors and entrepreneurs with innovative ideas for new products and technologies.   These inventors need the protection of the first to invent system to be able to fully vet their technology before publicly disclosing it after filing for a patent.

Now is the time to express your opinion.  Contact your Congressional representative and let them know how you stand on the America Invents Act, especially whether you support or oppose the conversion from a first to invent to a first to file system.

Each month, the Bureau of Labor Statistics (BLS) of the U. S. Department of Labor sends out a press release announcing the total number of employed and unemployed persons in the United States for the previous month, along with many characteristics of such persons.  Many people think that the federal unemployment rate is derived by adding the total of claims filed for unemployment insurance benefits under State or Federal Government programs.  This isn’t the case.  Let’s examine how the unemployment rate is generated to see how accurate it is.

The January 2011 official unemployment rate was 9.0%, down from 9.4% in December, and a high of 10.2% in November 2009 during the Great Recession.  Some people claim that if the unemployment rate were calculated as it was during the Great Depression, the current rate would be close to double what it is and nearly as high as the rates back in the 1930s.  The problem with this claim is that there was no official unemployment rate until the 1940s.  The rates we use today for this era were reconstructed after the fact based on the work of three economists:  Stanley Lebergott, Michael Darby, and G. H. Moore.  Libergott included those on work-relief as unemployed while Darby did not.  Libergott and Darby agreed on an unemployment rate of 3.2% in 1929 rising to a high of 23.6% and 22.9% respectively in 1932.  After the work-relief programs began in 1934, their rates diverged to a peak in 1936 of 16.9% compared to 9.9%.  If you compare the two series, it appears that between 1934 and 1941, WPA projects took two to 3.5 million workers off the unemployment roles, and shaved the rate by 4 to 7 percentage points.

During the Great Depression, a number of ad hoc attempts were made to calculate the rate using various sampling methods, which led to widely divergent results.  In 1940, the Work Projects Administration (WPA) began publishing statistics on those working, those looking for work, and those doing something else based on a survey of a sample population.

In 1962, high unemployment and two recessions in three years led to the formation of The President’s Committee to Appraise Employment and Unemployment Statistics to reassess the concepts used in gathering labor-market data by the BLS.  The Committee suggested some improvements, and the BLS tested new survey techniques for several years, before making a number of changes in 1967.  The Committee also recognized the need for more detailed data on persons outside the labor force, and the BLS began collecting information on those who wanted a job although they were not looking for work.

Among the most important changes was the requirement that workers must have actively sought employment in the last four weeks in order to be classified as unemployment.

In 1976, the BLS first published the original U1 to U7 tables to provide more information on the hidden unemployed, who would be part of the labor force in a full-employment scenario.   These tables were revised in the 1994 redesign (becoming U1 to U6) and added the requirement that discouraged workers must have sought work in the prior year.

U1:  Percentage of labor force unemployed 15 weeks or longer.

U2:  Percentage of labor force that lost jobs or completed temporary work.

U3:  Official unemployment rate that is the proportion of the civilian labor force that is unemployed but actively seeking employment.

U4:  U3 rate + “discouraged workers who have stopped looking for work.

U5:  U4 rate + other “marginally attached workers” who would like and are able to work, but have not looked for work recently.

U6:  U5 rate + part-time workers who want to work full time, but cannot due to economic reasons.

These unemployment rates are derived from a monthly survey of 60,000 households known as the Current Population Survey (CPS).  The CPS sample is selected to be representative of the entire population of the U. S.  All of the counties and county-equivalent cities in the country are grouped into 2,025 geographic areas (sampling units), and the Census Bureau then designs and selects a sample consisting of 824 of these geographic areas to represent each state and the District of Columbia.  The sample is a State-based design and reflects urban and rural areas, different types of industrial and farming areas, and the major geographic divisions of each state.  This mix of geographic areas to represent each state is important because there is a wide range of unemployment rates from state to state.  For example, North Dakota had the lowest rate for December 2010 at 3.8%, while Nevada had the highest rate at 14.5%, with California not far behind at 12.5%.

Every month, 25% of the households in the sample are changed, so that no household is interviewed more than four consecutive months.  After a household is interviewed for four consecutive months, it leaves the sample for eight months, and then is interviewed for the same four calendar months a year later, before leaving the sample for good.  This procedure results in approximately 75 percent of the sample remaining the same from month to month and 50 percent from year to year.

Each month, 2,200 Census Bureau employees pose questions regarding whether individuals in the home have a job or if they are laid off.  Other questions query whether the persons are available for work, and the techniques they have used to look for work in the preceding month.  At the time of the first household interview, the interviewer prepares a roster of the household members, including their personal characteristics, date of birth, sex, race, marital status, education, and so on, and their relationships to the head of household.  The interviewers don’t decide on the respondents’ labor force classification.  They simply ask the questions in the prescribed way and record the answers.  Based on information collected in the survey and definitions programmed into the computer, individuals are then classified as employed, unemployed, or not in the labor force.

This information is then compared as a percentage to the number of people in the labor force, which consists of all persons employed or unemployed over the age of 15 and not on active duty in the Armed Forces or in an institution (correctional facility, residential nursing, or mental health care facility.)

The information collected is adjusted to account for independent population estimates across the entire nation.  These adjustments take into account factors such as state of residence, sex, age, and race.  The rate is calculated by dividing the total of the civilian labor force by the number of unemployed to get the percentage of unemployed.  The BLS releases the data collected on the first Friday of each month as the national unemployment rate.

Is it possible to skew the numbers to make the unemployment rate look better than it really is?  Yes, and there are two main ways to do it:  (1) select the geographic areas that have the lowest rate of unemployment as your sample to come up with a lower number of unemployed persons or (2) lower the number representing the total of the civilian labor force so that you get a lower percentage when dividing that number by the number of unemployed.   In addition, methods one and two could be combined.

It’s widely understood that it takes about 200,000 new jobs each month to stay even with the workers entering the labor force.  Economists say that it takes the creation of about 3,000,000 jobs to lower the unemployment by a full percentage point.  They also say that you need 5% GDP growth to lower the rate by a full percentage point.  Neither of these occurred in 2010.  The national GDP growth was only 2.8% for 2010 and is predicted to grow by only 3.5% in 2011.  Less than a million new jobs were created last year.  Separate government data shows that only 36,000 net jobs were created in January, barely a quarter of the number needed to keep pace with population growth.  Taking this into consideration, does it seem real that the official U3 unemployment rate dropped by .4 percent this January from 9.4% to 9.0%?  Remember, this is the same administration that directed the BLS to stop producing the jobs in manufacturing chart last March when the number of manufacturing jobs dropped below twelve million.

What did happen was that 2.2 million left the labor force in the past year, meaning that there was a lower number to use as the numerator for dividing the number of unemployed to get the unemployment percentage.   These are people who have given up looking for a job.  The real unemployment rate is the U6 rate that includes the “discouraged workers” and workers with a part-time job that want a full-time job.  The U6 rate on the BLS website for January is 16.1%.

According to a Gallup poll released on February 12^th, the U. S. unemployment rate is 10.2%, and the underemployed rate (equivalent to the U6 rate) is 19.7%, rounded off to 20% on the Gallup website.  Another recent Gallup poll shows that 35% of Americans feel unemployment is the biggest challenge facing the nation right now.

Involuntary unemployment has devastating effects on American workers and their families.  Long-term unemployment leads to depression and despair to illness.  Loss of American employment decreases household wealth, reducing consumption of locally manufactured goods, which further stifles job creation.  Joblessness, homelessness, and hopelessness are the end result.

We need a plan to rebuild America to create the jobs Americans need.  The Reshoring Initiative is a good start to bring manufacturing work back to the United States from offshore to create more higher paying jobs for Americans.  Only then will the unemployment rate truly drop, and local, state, and budget deficits will begin to diminish.

In the increasingly competitive global marketplace, manufacturers need to continually strive to reduce costs to keep or increase market share.  This is one of the key factors in making the decision of whether to make parts in-house, outsource to domestic suppliers, or outsource offshore.

Even after a company makes the decision to outsource to a supplier, most don’t look beyond the quoted unit price in making the decision about which supplier to select.  This is especially true when comparing the quotes for domestic vs. offshore suppliers.   Some companies choose to outsource offshore because the price is cheaper than a domestic supplier.  They don’t add in the costs for transportation, much less all of the other “hidden costs” of dealing with an offshore supplier.

In order to make the correct decision for outsourcing, a company needs to understand the concept of “total cost of ownership” for outsourcing manufacturing.

What is “Total Cost of Ownership?”  It is an estimate of the direct and indirect costs and benefits related to the purchase of any part, subassembly, assembly, or product.  The Gartner Group originated the concept of  (TCO) analysis several years ago, and there are a number of different methodologies and software tools for calculating the TCO for various industries, products, and services.

Total Cost of Ownership includes much more than the purchase price of the goods paid to the supplier.  For the purchase the types of manufactured products we are considering, it should include all of the other costs associated with the purchase of the goods, such as:

• Geographical location
• Transportation alternatives
• Inventory costs and control
• Quality controls
• Reserve capacity
• Responsiveness
• Technological depth

The search for low cost areas for manufacturing isn’t something new. Fifty years ago, northern and New England companies started moving manufacturing to the southern states. Twenty-five years ago, many West Coast manufacturers started moving high– volume production offshore to Hong Kong, Singapore, and the Philippines. “Offshoring” refers to relocating one or more processes or functions to a foreign location.  The next lower cost area was Mexico with the advent of the maquiladoras.

For the past 15 years, many manufacturers have sought to reduce costs by offshoring all or part of their manufacturing processes in China.   In the last decade, outsourcing offshore has evolved from a little-used practice to a mature industry.  Even conservative companies are now willing to experiment with going offshore to gain a competitive edge.  The concept of globalization has become part of the fabric of today’s business.

Many times, the decision to outsource offshore is based on faulty assumptions that can have unpleasant consequences.  In some cases, the basis for the decision is well intentioned, such as to win new business by being close to a customer.

But, with every business decision comes an assumption, and more often than not, the related assumptions are erroneous.  Here’s a list of well intentioned but often-faulty assumptions:

• Longer lead times won’t affect our cost calculations very much.
• Overseas suppliers have the same morals and work ethics as we do.
• Overseas laws will protect our proprietary information.
• We can teach our suppliers to reach our quality needs and to build our product reliably and efficiently.
• Communication will not be an issue given daily conference calls, the Internet, and the fact that the supplier speaks English.
• Assessment and travel costs won’t change our cost calculations very much.
• The increase in delivery and quality costs won’t be significantly different than our cost calculations.
• Lean manufacturing and Six Sigma methodologies can be taught to suppliers before our company’s bottom line is affected.

In actuality, many case studies have shown that these assumptions were orders of magnitude off from reality.  The problems with making these assumptions are:

• It doesn’t capture a reasonable amount of variation.  Each lot takes weeks more time than anticipated to get to the U.S. or customer site for evaluation.
• The overlying methods for producing product or service have gotten more complex, not less.  In general, costs rise with complexity.
• The company doesn’t know the hidden costs that exist (i.e., process stability, process capability over time, potential for future deviations from the current process).
• The company loses complete control of quick changes to react to hidden costs.  It’s like trying to control production via remote control.

Accountants deal with hard costs such as material costs, material overhead costs, labor costs, labor overhead costs, quality costs, outside services, sales, general and accounting costs, profits, etc. What they don’t measure are the intangible costs associated with business such as the true costs of delay, defects, and deviations from standard or expected processes (the three D’s).

These costs are often called hidden factories because they keep everyone busy generating absolutely nothing of any tangible or openly measured value.  Another way to understand these costs is that they produce results that no one, especially the customer would want to pay for.  In addition to obvious direct costs – such as additional meetings, travel, and engineering time – hidden factories also indirectly produce many forms of “soft” costs, such as loss of good will, loss of competitiveness, extended warranty costs, and legal costs.

When it comes to outsourcing, there’s more to consider than the quoted price.  Some outsourcing costs are less visible – or downright hidden.  Here are the top hidden costs of outsourcing offshore:

• Currency Fluctuations – last year’s invoice of $100,000 could be $140,000 today.
• Lack of Managing an Offshore Contract – underestimating the people, process, and technology required to manage an outsourcing contract.
• Design changes – language barriers make it difficult to get design changes understood and implemented
• Quality problems – substitution of lower grade or different materials than specified is a common problem
• Legal liabilities – offshore vendors refuse to participate in product warrantees or guarantees
• Travel Expenses – one or more visits to an offshore vendor can dissipate cost savings
• Cost of Transition – overlooking the time and effort required to do things in a new way.  It takes from three months to a year to complete the transition to an offshore vendor.
• Poor Communication – communication is extremely complex and burdensome.
• Intellectual Property – foreign companies, particularly Chinese, are notorious for infringing on IP rights without legal recourse for American companies

In the past, my experience was that once manufacturing moved out of the United States, it rarely came back.  However, in the past three years, we have seen more companies coming back from doing business in China. The main problems these companies encountered were:

• Substitution of materials
• Inconsistent quality
• Stretched out deliveries
• Inability to modify designs easily and rapidly

There’s also a growing realization that when it comes to quality and location, location may be the best guarantee of all.  It’s hard, very hard, to outsource quality, particularly to a distant land many miles and time zones away.  A growing number of manufacturers are realizing that “you get what you pay for” from their offshore suppliers. Applying good quality principles takes money, education, and experience, many of which are in short supply in the low-wage countries capturing the majority of offshoring dollars these days.

The “desirable” locations for cheaper outsourcing will change over time just as they have in the past fifty years.  The purely financial benefits of lower pricing will erode over time.  The challenge for America is to keep as many companies as possible growing and prospering within the United States.  As more manufacturers gain a correct understanding of the True Cost of Ownership for outsourcing manufacturing, it will help bring back and maintain more manufacturing in the United States.  You can help save American manufacturing by making sure everyone in your company gains this correct understanding.

Germany surpassed the United States to become the world’s leading exporter in 1992, around the time that Germany joined the European Union as a founding member.  The United States remained the second highest exporter until China surpassed it in 2008.  Germany remained number one until 2009 when China surpassed it to become the world’s top exporter.  Germany exported $1.17 trillion compared to the $1.057 trillion of the United States.  However, China’s exports were $1.2 trillion for 2009.  Germany’s exports fell by 18.4 % from 2008, the largest decline in 60 years, while China’s exports fell only 16 %.

“’This is just one more step by China in attaining economic size commensurate with its population,’ said Arthur Kroeber, managing director of Dragonomics, an economic research firm in Beijing.  Germany has a population of about 80 million, while China’s population is about 1.3 billion.”

If population were a key factor, then at over 300 million in population, the United States would have maintained the number one status until being surpassed by China.  The key question is how did Germany remain number one over the United States for so long and how did they lose this ranking to China?

Germany is the largest national economy in Europe, the fourth largest by nominal GDP in the world, and fifth by GDP in 2008.  The service sector contributes around 70 % of the total GDP, industry 29.1 %, and agriculture 0.9 %.  Germany is relatively poor in raw materials.  Most of the country’s products are in engineering, especially in automobiles, machinery, metals, and chemical goods.  Germany is the leading producer of wind turbines and solar power technology in the world.   Exports account for more than one-third of national output.  Germany is such an export-driven economy that German companies own 35% of the container ships in operation worldwide.

By the Fortune Global 500 ranking of the world’s 500 largest stock market listed companies, 37 are headquartered in Germany.  Well-known global brands are:  Mercedes Benz, BMW, Volkswagen, Audi, Porsche (automobile), Adidas and Puma (clothing and footwear), Bayer and Merck (pharmaceuticals), DHL (logistics), T-Mobile (telecom), Lufthansa (airline), SAP (computer software), Siemens (computer services), and Nivea (personal care).  You may have been as surprised as I was to learn that DHL, T-Mobile, and Nivea are German companies.

With the manufacture of 5.2 million vehicles in 2009 (compared to the U. S. total of 7.9 million), Germany was the world’s fourth largest producer and largest exporter of automobiles.  German automotive companies enjoy an extremely strong position in the so-called premium segment, with a combined world market share of about 90 %.  Germany places five luxury automotive brands among the world’s top global brands for all sectors, more than any other country.  Germany’s reputation for quality precision engineering gives them a competitive advantage in selling high dollar vehicles in foreign countries.  Thus, German automotive products spearhead the high value and growth of Germany’s exports.

Germany is also the world’s leader in mechanical engineering systems analysis and design, holding about 20% of this global market.  This precision engineering expertise gives Germany a competitive advantage in producing machine tools (the tools that make tools and equipment).  For example, Germany has a 58 % market share for producing reciprocating pumps used for drilling and water purification and produces 34 % of packaging and bottling equipment used around the world.

It isn’t just large firms that are market leaders.  Small-to-medium sized manufacturing firms that specialize in technologically advanced niche products are vitally important.  It is estimated that about 1,500 German companies occupy a top three position in their respective market segment worldwide.  In about two thirds of all industry sectors, German companies belong to the top three competitors.

Germany’s tax structure contributes to their success as an exporter and puts a barrier on imports. Germany’s corporate tax rate is 15 %, but they also have a solidarity surcharge (5.5 % of corporate tax) and a trade tax charged by local authorities.  As of 2008, the rate averaged 14 % of profits subject to trade tax.   In addition, all services and products generated in Germany by a business entity are subject to value-added tax (VAT) of 19%. Certain goods and services are exempted from value-added tax by law.  Value-added taxes are added in paid for all along the supply chain, and then are rebated for exports.  A VAT is added at the border to imports as a balancing trade strategy to discourage imports.

I had heard a rumor that one of the factors in Germany’s success is that they don’t tax revenue on exports, but was unable to confirm this by diligent research.  I did learn that Germany practices a “national jurisdiction” on taxes wherein they tax national consumption in contrast to the “unitary jurisdiction” of the United States wherein companies are taxed on revenues from worldwide sales (with a deduction for taxes paid to foreign countries).  This taxing practice may be the source of the rumor or the source may be confusing it with the value-added taxes that are rebated for exports.

In a June 28, 2010, economist Ian Fletcher, commented, “Germany, like the U. S., is nominally a free-trading country.  The difference is that while the U. S. genuinely believes n free trade, Germany quietly follows a contrary tradition that goes back to the 19^th-century Germany economist Friedrich List… So despite Germany’s nominal policy of free trade, in reality a huge key to its trading success is a vast and half-hidden thicket of de facto non-tariff trade barriers.”

Fletcher, in turn quotes from a report by the Heritage Foundation:  “Non-tariff barriers reflected in EU and German policy include agricultural and manufacturing subsidies, quotas, import restrictions and bans for some good and services, market access restrictions in some services sectors, non-transparent and restrictive regulations and standards, and inconsistent regulatory and customs administration among EU members.”

Another opinion of Germany’s export success as reported in The New York Times, is “the roots of Germany’s export-driven success reach back to the painful restructuring under the previous government of Chancellor Gerhard Schröder.  By paring unemployment benefits, easing rules for hiring and firing, and management and labor’s working together to keep a lid on wages, ensured that it could again export its way to growth with competitive, nimble companies producing the cars and machine tools the world’s economies – emerging and developed alike – demanded.”

The same article reported that Germany’s Chancellor Angela Merkel resisted the use of government stimulus spending that the United States and some European partners used to handle the recession.  Instead of extending unemployment benefits like the United States has done several times since the recession began, Germany “extended the “Kurzarbeit” or “short work” program to encourage companies to furlough workers or give them fewer hours instead of firing them, making up lost wages out of a fund filled in good times through payroll deductions and company contributions.  At its peak in May 2009, roughly 1.5 million workers were enrolled in the program,” and the Organization for Economic Cooperation and Development estimated that   “more than 200,000 jobs may have been saved as a result.”

As a result, Germany’s unemployment rate at the height of the global recession was 9.0% in contrast to the 10.2% of the United States.  The German jobless rate in October 2010 was down to 7.0% in contrast to the 9.6% of the United States.  Germany is one of the few economies experiencing a solid recovery and one of the even fewer economies without a substantial deficit crisis on its hands.  Germany’s exports surged month by month in 2010, but year-end data hasn’t been released yet.

Numerous manufacturers in Germany see China as a key driver in their recovery from the global financial and economic crisis.  In July 2010 , Chancellor Merkel took the heads of major German corporations with her on a four-day visit to China.  As a result Siemens signed a contract worth $3.5 billion (2.7u billion euro) with Shanghai Electric Power General Equipment to develop steam and gas turbines.  Daimler signed a contract worth 6.35 billion yuan (720 million euro) with Beiqi Foton Motor to build trucks.

Even small-to-medium manufacturers are benefiting from increased exports to China.  Nobilia, a mid-size manufacturer of prefab kitchens “made in Germany,” is selling its kitchens to construction companies building huge housing projects in China.  Company spokeswoman Sonja Diemann said, “These are big projects with 1,000-plus apartment units.  There is a growing group of consumers who have money, seek quality products and know that Germany has a good reputation in manufacturing.”

German trade with China has grown from $41 billion in 2001 to $91 billion dollars in 2009, and now represents 5% of German trade.  Germany’s exports to China in 2009 accounted for $36 billion, a 7% increase over 2008.  However, Chinese exports to Germany accounted for $55 billion, and Germany has been running a trade deficit with China since 2005.  It shows that even with the addition of a VAT on imports and other non-tariff trade barriers, Germans are increasingly buying the cheaper consumer goods that China is flooding onto the world market.

If even Germany has a trade deficit with China and can’t fend off the Chinese juggernaut on trade of consumer products, who can?  This is a question that the economists of Germany and the United States must carefully consider.  One answer is ending the so-called “free trade” coalition as advocated by Ian Fletcher in his book, Free Trade Doesn’t Work, What Should Replace it and Why.  One thing I do know, the negotiation of more “free trade” agreements that provide an unfair playing field for developed countries is not the answer.

On March 11, 2010, President Obama established the Export Promotion Cabinet by Executive Order 13534 and tasked them with a plan to achieve the goal of doubling U. S. exports in five years that he had stated in his 2010 State of the Union address.

Sixteen representatives from the Secretary of State down to the Director of the United States Trade and Development Agency were appointed to this Cabinet, but the final report, released on September 15, 2010, was the product of an intensive six-month collaboration between this Cabinet and the 20 federal agencies that make up the Trade Promotion Coordinating Committee (TPCC).  In addition, the TPCC Secretariat reviewed over 175 responses to a Federal Register notice requesting input to the National Export Initiative (NEI) from small, medium, and large businesses; trade associations; academia; labor unions; and state and local governments.

In 2008, U. S. exports represented records levels of GDP (12.7 percent) and supported over 10 million jobs (6.9 percent of fully employed workers).  This was the highest percentage level of GDP since the beginning of World War I in 1914 and marked the high point of a 70-year trend that began in the early 1930s.  However, exports fell from $1.8 trillion in 2008 to $1.57 trillion in 2009 during the recession.

The report states:  “The National Export Initiative (NEI) is a key component of the President’s plan to help the United States transition form the legacy of the most severe financial and economic crisis in generations to a sustained recovery …The NEI’s goal of doubling exports over five years is ambitious.  Exports need to grow from $1.57 trillion in 2009 to $3.14 trillion by 2015.”

The NEI has five components:  improve advocacy and trade promotion, increase access to export financing, remove barriers to trade, enforce current trade rules, and promote strong, sustainable, and balanced growth.

The NEI Executive Order identified eight priorities for the plan, and the Export Promotion Cabinet developed recommendations to address each of these priorities, which cover all five components, cut across many Federal Government agencies, and focus on areas where concerted Federal Government efforts can help lift exports.  The following are recommendations for each priority:

Priority 1:  Exports by Small and Medium-Sized Enterprises (SMEs) – advocacy, promotion and export financing component

1. Help identify SMEs that can begin or expand exporting through a national campaign to increase SME awareness of export opportunities and U. S. Government resources.
2. Prepare SMEs to export successfully by increasing training opportunities for both SMEs and SME counselors.
3. Connect SMEs to export opportunities by expanding access to programs and events that can unite U. S. sellers and foreign buyers.
4. Once SMEs have export opportunities, support them with a number of initiatives, including improving awareness of export finance programs.

Priority 2:  Federal Export Assistance – trade promotion component

1. Create more opportunities for U. S. sellers to meet directly wit foreign buyers by bringing more foreign buyer delegations to U. S. trade shows and encourage more U. S. companies to participate in major international trade shows.
2. Improve cooperation between TPCC agencies to encourage U. S. green technology companies to export by matching foreign buyers with U. S. producers.

Priority 3:  Trade Missions – trade promotion component

1. Increase the number of trade and reverse trade missions, including missions led by senior U. S. government officials.
2. Improve coordination with state government trade offices and national trade associations.

Priority 4:  Commercial Advocacy – trade promotion component

Leverage multiple agencies assistance in the advocacy process and extend outreach efforts to make more U. S. companies aware of the Federal Government’s advocacy program.

Priority 5:  Increasing Export Credit – export financing

1. Make more credit available through existing credit platforms and new products.
2. Increase outreach to exporters, foreign buyers bankers, and other entities in order to build awareness of Government assistance.
3. Make it easier for exporters and other customers to use Government credit programs by streamlining applications and internal processes.

Priority 6:  Macroeconomic Rebalancing – strong, sustainable, and more balanced global growth

In the short term, the U. S. and its G-20 partners must work to ensure that the global economy shifts smoothly to more diversified sources of economic growth.  Over the long term, shifts in the composition of economic growth in our trading partners will also be crucial to U. S. export growth.  Actions to reduce surpluses and stimulate domestic demand for imports will be required by a broad range of countries.

Priority 7:  Reducing Barriers to Trade – removing trade barriers and enforcing trade obligations components

1. Conclude an ambitious, balanced, and successful WTO Doha Round that achieves meaningful new market access in agriculture, goods, and services.
2. Conclude the Trans-Pacific Partnership (TPP) Agreement to expand access to key markets in the Asia-Pacific region,
3. Resolve remaining issues with pending FTAs, such as the United States – Korea FTA.
4. Address foreign trade barriers – especially significant non-tariff barriers – through use of a wide range of U. S. trade policy tools.
5. Use robust monitoring and enforcement of WTO trade rules and other U. S. trade agreements.

Priority 8:  Export Promotion of Services – advocacy and trade promotion components

1. Build on the activities and initiatives outlined in Priorities 1 – 7 with enhanced focus on the services sector since it accounts for nearly70 percent of U. S. GDP.
2. Ensure better data and measurement of the services economy to inform commercial decision-making and policy planning.
3. Continue to assess and focus on key growth sectors and emerging markets such as China, India, and Brazil; increasing the number of foreign visitors to the U. S.
4. Better coordinate services export promotion efforts.

There are four general themes that apply to all of the priorities and recommendations in order to achieve the goal of doubling the U. S. exports in five years:

1. Strengthen interagency information sharing and coordination.
2. Leverage and enhance technology to reach potential exporters and provide U. S. businesses with the tools necessary to export successfully.
3. Leverage combined efforts of State and local governments and public-private partnerships.
4. Have united goals for TPCC member agencies to support the NEI’s implementation

The plan admits that the Federal Government alone cannot succeed in this initiative; its ultimate success will be determined by the success of U. S. companies selling their goods and services internationally.  A continued dialogue with the business community will be required to help ensure that the NEI is addressing their export challenges.

On December 7, 2010, U. S. Energy Secretary Steven Chu announced the establishment of the Renewable Energy and Energy Efficiency Export Initiative as part of its National Export Initiative and Trade Promotion Coordinating Committee.  “Expanding U. S. clean technology exports is a crucial step to ensuring America’s economic competitiveness in the years ahead,” said Secretary Chu.  “The initiatives we are announcing today will provide us with a better understanding of the global clean energy marketplace and help boost U. S. exports.”

The Initiative is divided into two parts:  (a) an assessment of the current competitiveness of U. S. renewable energy and energy efficient goods and services and (b) an action plan of new commitments that facilitate private sector efforts to significantly increase U. S. renewable energy and energy efficient exports within five years.  As part of the Initiative, the Administration created www.export.gov/reee, a web portal that consolidates information on government-sponsored export promotion programs.

The next article will examine whether or not the plan will work to achieve the stated goal.

In June 2010, the National Association of Manufacturers (NAM) released a report titled, “Manufacturing Strategy for Jobs and a Competitive America.”  In considering the recommendations made by NAM, it is important to understand where they are coming from as an organization and what kind of companies comprise their membership.

NAM is the largest, most well known trade association in the United States, headed up by former Governor of Michigan, John Engler.   Many Fortune 500 companies that are manufacturers are members of NAM, and the member companies that comprise NAM’s policy committees and subcommittees are mainly large, multinational companies because small-to-medium-sized companies don’t have full-time representatives in Washington where policy matters are discussed and voted on.  Also, many of these multinational companies have manufacturing operations in China and other foreign countries, and this influences their position on trade issues.

NAM’s Executive Summary begins with what I consider absolute truths:  “America’s prosperity and strength are build on a foundation of manufacturing.  Manufacturers create, innovate and employ millions of Americans in some of the best jobs our country has to offer.”

We agree on the fact that the United States needs a comprehensive manufacturing strategy to be able to compete against foreign governments that provide all the tools of government to support their manufacturing industries.

NAM’s proposed strategy “highlights the need for:

• Tax policies to bring American more closely into alignment with major manufacturing competitors
• Government investments in infrastructure and innovation
• Trade initiatives to reduce barriers and open markets to U. S. exports”

The need to create a national tax climate that allows U. S. manufacturers to be competitive in the global marketplace is unquestionably the highest priority.  We must reduce the corporate tax rate and promote fair rules for taxation of active foreign income, both of which I wrote about in my recent article, “Congress – It’s Jobs, Stupid,” as well as in previous articles and my book.  We must institute permanent lower tax rates for individuals and small businesses because most small businesses are not incorporated and create the majority of new jobs in the United States.

There is no question that the continuing expansion of federal mandates and labor regulations undermines employer flexibility and increases costs that discourages hiring new employees.  New regulations and federal mandates must be rejected and opposed.

Implementing a common sense, fair approach to legal reform is vital to bringing legal costs under control and eliminating the disadvantage American companies face in competing globally.

We definitely need to create a regulatory environment that promotes economic growth.  U. S. manufacturers are forced to comply with scores of regulations that manufacturers don’t have to face in other countries.    As NAM’s plan points out, “the Small Business Administrations office of Advocacy has estimated that regulatory compliance costs amount to $1.1 trillion annually.”

I share NAM’s goal for the United States to be the best country in the world to innovate and perform the bulk of a company’s goal R&D, but this goes against the trend of its own membership of large, multinational companies.  More and more R&D is being conducted offshore in China and India each year.  The danger is that innovation and production are intertwined.  Stephen Cohen, co-director of the Berkeley Roundtable on the International Economy at the University of California Berkeley, said, “Most innovation does not come from disembodied laboratory.  In order to innovate in what you make, you have to be pretty good at making it – and we are losing that ability.”

A 2008 report by Duke University’s Fuqua School of Business Offshoring Research Network and Booz Allen Hamilton, predicted that offshoring of R&D would increase 65 percent and offshoring of engineering services would increase 80 percent in the next 18 to 36 months.

I agree with NAM’s recommendations regarding enacting tax provisions that stimulate investment and recovery, encouraging the federal government’s critical role in basic R&D, and enhancing efforts by the federal government to protect American Intellectual Property (IP) and impede the continuing trade in counterfeit products that results in hundreds of thousands of jobs annually.

However, I question NAM’s recommendation to support substantial increases in the number of employer-sponsored visas as the solution to attract the best talent within the United States and from the entire world.  With the U. S. unemployment ranging between a low of 9.6 to a high of 10.0 in the past year, the last thing we need is more immigrant workers, legal or otherwise taking jobs away from qualified Americans.  There are plenty of highly skilled American workers to fill the needs of American manufacturers.  We are still attracting a large number of foreign undergraduate and graduate students, but a high number of Indians and Chinese are returning to their native countries to work in the industries their governments support instead of remaining in the United States.

I share NAM’s goal to have the U. S. be a great place to manufacture to meet the needs of the American market and export our products to the world.  The United States outdated export control system needs to be modernized to encourage exports and strengthen national security.  Small-to-medium-sized manufacturers need more assistance in export promotion and export credit.   The biggest problem is that the United States is no longer the source for products consumers buy around the world (electronics, small appliances, clothing, etc).  These products are now being made in China and other Asian countries and imported into the United States and other developed countries.  The end result is the export of more and more high tech products by United States manufacturers, some of which involve technology useful for military weapon systems.

It is imperative that the United States develop a comprehensive energy strategy that embraces an “all of the above” approach to energy independence.  A large portion of our worldwide trade deficit is for the importation of oil.  We must end our dependence on imported oil and utilized all of our domestic resources for energy generation.

The United States already leads the world in innovation and investment related to protecting the environment to the point that American manufacturers are at a competitive disadvantage compared to China and other Asian countries.  Until these countries start enacting similar laws and regulations or enforcing existing ones, the United States must avoid signing treaties that make it even harder for American companies to compete in the global marketplace.

At a time when the federal government’s budget deficit exceeds $1.5 trillion for 2010 and many cities and states are near bankruptcy, it is unlikely that it will be possible to invest in the infrastructure that will help American manufacturers move products and people more efficiently.

I strongly disagree with NAM’s recommendation to “enact pending trade agreements and negotiate additional agreements in the Pacific area and elsewhere.”  In my June blog article, “Do Free Trade Agreements Create Jobs?” I pointed out that NAFTA, effective in 1994, and the subsequent free trade agreements haven’t created American jobs, they have cost American jobs.  Between 1994 and 1999, we lost about a half million manufacturing jobs, but we’ve lost another 5.5 million jobs since the year 2000 when China was granted Most Favored National status and gained access to the World Trade Organization thereafter.  Our trade deficit with China rose from $84 billion in 2001 to $226.9 billion in 2009, down from $268 billion in 2008 due to the worldwide recession.  As Ian Fletcher stated in his book, Free Trade Doesn’t Work, What Should Replace It and Why, Chinese imports now constitute 83 percent of our non-oil deficit.  Elsewhere in his book, Fletcher noted, “It has been estimated that every billion dollars of trade deficit costs American about 9,000 jobs.  In his book, Mr. Fletcher makes a compelling argument that a “natural strategic tariff” should replace free trade agreements.  I strongly suggest that NAM and other national economists consider Mr. Fletcher’s proposed solution.

In conclusion, NAM’s proposed manufacturing strategy has many admirable recommendations; however, it is really a codification of positions and recommendations promoted by NAM for the past 20 years during which we have lost over six million manufacturing jobs.  NAM’s strong emphasis on a progressive international trade policy based on “free trade” will not save American manufacturing in the future.  The continuation and expansion of “free trade” policies will lead to the destruction of more American industries and the loss of more American jobs. We must change course if we want the United States to remain a great nation.  There is still time, but the clock is ticking!