Here’s What It Will Really Take For The U.S. To Revitalize Manufacturing

Desy Papper

What do silicon chips and ketchup packets have in common? They are the most recent examples of products in short supply—and an illustration of why U.S. manufacturing capabilities matter for everyone from the auto-company CEO to the french-fry ordering consumer. Smart industry robot arms for digital factory production technology showing […]

What do silicon chips and ketchup packets have in common? They are the most recent examples of products in short supply—and an illustration of why U.S. manufacturing capabilities matter for everyone from the auto-company CEO to the french-fry ordering consumer.

While U.S. factory output increased last month by the most in eight months, overall production capacity remains well below prepandemic levels, revealing just how exposed supply chains still are to shocks and disruptions.

The imperative to make domestic manufacturing more competitive comes at a time when shortages of semiconductors, started by pandemic interruptions and worsened by production issues at multibillion-dollar chip factories, are sending shock waves through the economy.

These developments have highlighted the urgency for the United States to accelerate its domestic manufacturing base not only in moments of crisis, but also in good times.  The potential benefits at stake are significant: new technologies, process innovations, input trends, and demand patterns are creating opportunities that did not exist even a decade ago. Indeed, newly published research from McKinsey Global Institute identifies 16 key manufacturing industries that together could boost annual GDP by more than 15 percent—and add up to 1.5 million jobs.

But what will it really take for the U.S. to revitalize manufacturing?

Start getting specific

Let’s start with the bad news. Today, research estimates that there are roughly 25 percent fewer U.S. manufacturing firms and plants than there were in 1997. Increased import dependence has therefore left a range of strategic U.S. manufacturing supply chains exposed to greater global risks. To mitigate the impact of disruptions—those we feel in real time today, and assuredly not for the last time—manufacturing needs a healthy domestic supplier base and more resilient supply-chain management to thrive.

For that to occur, we need a targeted approach to help revitalize struggling small and midsize suppliers. The national conversation about manufacturing tends to focus on large, well-known companies, but the bulk of the production is done by the SMEs—focusing on them can improve the entire sectors resilience and create more jobs. These small suppliers tend to be 40 percent less productive than their larger counterparts, due in part to their inability to invest in upgrading equipment and plants. As a result, they are unable to invest in new equipment and technologies that would boost productivity and U.S. manufacturing as a whole—both critical outcomes in a competitive landscape where speed, customization and last-mile delivery are tablestakes.

More ominously, these smaller companies also account for most of sector’s employment. Of the 16 industries the report identifies as “key to growth,” those dominated by scale-based activity directly employ more than three million workers, with more than 830,000 in SMEs.

That’s a tall order. Policymaking may therefore play an important role. One potential long-term solution, for example, could be a national industrial finance corporation with the ability to raise manufacturing bonds on the private capital market, then channel the funding via long-term vehicles to thousands of small and medium sized suppliers, and combine loans with technology support to improve productivity and reduce investment risk.

But large manufacturers can also make a difference. An important move would be to change incentive structures for their own purchasing teams. Instead of just monitoring key suppliers, OEMs could mentor them, solicit their ideas, invest in their capabilities, and build trust to create preferred relationships.

A digital jolt

Indeed,  the challenges facing the sector are not insurmountable. Advances in technology and changing industry structures are creating new opportunities. For example, Industry 4.0 technologies can raise productivity by up to 40 percent and shift some scale-based activity to flexible production.

While in many ways US manufacturing lags behind in technologies such as advanced data collection, analytics, machine learning, and augmented reality, quiet business transformations have been underway. P&G’s plant in Lima, Ohio is one of a small, yet growing list of factories worldwide chosen to join the Global Lighthouse Network (GLN). The GLN, a collaborative project of the World Economic Forum and McKinsey & Company, has assessed the adoption of 4IR at scale of more than 1,000 leading manufacturers leaders.

Over the past several years, P&G has had to contend with a shift in consumer trends that meant more-complex packaging and more products that had to be outsourced. The Lima plant invested in supply-chain flexibility, including digital twins, advanced analytics, and robotic automation. The results to date include a tenfold increase in speed to market for new products, a 5% boost in labor productivity, and—thanks to analytics–infused production planning—a 95% improvement in the syncing of demand and supply.

So what does all of this mean? How can smaller companies increase their productivity (or differentiation) to compete? How will companies of all sizes attract, develop, and retain top talent? Will we see a fundamental shift in the overall competitiveness of domestic manufacturing?

These are all questions that companies large and small will face in the next horizon and our research seeks to help answer. If one thing is certain manufacturing capabilities matter—not only to fuel the economy in good times but to keep it functioning in moments of crisis. Capturing these opportunities will not be easy, and will likely take coordinated public- and private-sector efforts. The time to start is now.

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