This is the first brief in Forrester's "Reviving U.S. Manufacturing With Technology" series. To regain global competitiveness, U.S. manufacturers in 2004 must fund IT projects that boost supply chain agility and product innovation and help capture service dollars.

U.S.-based manufacturers are losing competitiveness

This fall, Commerce Secretary Donald L. Evans previewed policies of the Bush administration to shore up the sagging U.S. manufacturing sector, which has lost 2.7 million jobs since July 2000 and must contend with an alarming drop in (see Figure 1):

1. Productivity. According to The Harbour Report, while the Big Three automakers have improved labor productivity, the most efficient North American car assembly plant is . . . Nissan Motor's Smyrna, Tenn., factory. When it comes to mingling efficiency and flexibility, U.S. carmakers are laggards: Honda Motor can produce as many as eight different models on a single assembly line-but Ford Motor Company is still stuck at two.

2. Quality. Foreign carmakers topped the J.D. Power and Associates' 2003 Initial Quality Study, with General Motors ranked a distant No. 5. U.S. consumers' Q2 2003 satisfaction score-as it relates to product quality-for household appliances made by Kenmore, Whirlpool, General Electric, and Maytag was 4.7 percent less than what it was in . . .1994.

3. Innovation. U.S. manufacturers account for two-thirds of all private-sector R&D-$127 billion in 2002. Yet, breakthrough innovations are rare: 90 percent of product development projects, like those in the CPG industry, are aimed at improving existing items. In June 2003, Senator Joseph Lieberman aired concern that the U.S. share of global semiconductor production of 300 mm wafer will be just 20 percent in 2005.

4. Cost advantage. Sourcing from within the U.S. is becoming expensive. In 2001, $526 billion-or 47 percent-out of all U.S. merchandise imports was that of U.S.-based OEMs buying from foreign factories or overseas affiliates of U.S. companies. Retailers are following suit: The $12 billion in goods that "everyday low prices" retailer Wal-Mart imported into the U.S. from China in 2002 alone would make Wal-Mart that country's eighth largest trading partner if it were a sovereign nation.

5. Demand. While demand for consumer items is picking up, sales of durable goods have stagnated. For instance, sales in the U.S. aerospace sector-having already dropped from $153 billion in 2001 to $148 billion in 2002-are predicted to decline 6.6 percent in 2003 to $138 billion. U.S. manufacturers aren't doing well on the export front, either: U.S.-made goods exports-as a share of gross domestic product (GDP)-peaked at 8 percent in 1997 and have pulled back by 6 percent ever since.

U.S. manufacturers have yet to learn how to use technology effectively

Unlike other sectors, manufacturers have yet to exploit IT as a competitive weapon. Their 2003 IT spending fell below budget, set at 4.1 percent of revenues versus 5.8 percent for other sectors (see the June 20, 2003 Forrester Brief "Tech Spending Summary: Manufacturing"). Not surprising, given that 38 percent of manufacturing business execs are dissatisfied with IT (see the March 31, 2003 Forrester Brief "Tech Spending Profile: Manufacturing, Q1 2003"). But execs should blame themselves for failed IT projects, such as supply chain management (SCM), that (see Figure 2):

• Lack focus and oversight. Decentralized IT decision-making in the 1990s led to a proliferation of SCM projects. Of the manufacturers surveyed by Forrester, 50 percent reported three or more concurrent SCM implementations (see the November 2002 Forrester Report "Navigating The Supply Chain Project Maze"). And given that only 26 percent of manufacturers need executive approval for new IT investments, they end up spending $6.8 million and 1.6 years per SCM project.

• Overlook process and people issues. Fifty-four percent of manufacturers feel that their supply chain apps haven't met their expectations and point to business process rigidity and lack of user buy-in as major impediments (see the December 2002 Forrester Report "SCM Processes Replace Apps: 2003 To 2008"). No wonder that 71 percent of manufacturers say that fixing IT project performance-by paying much closer attention to change management-is a very high, or top, priority (see the June 25, 2003 Forrester Brief "Executive Overview: Synchronized Deployment").

• De-emphasize innovation and customer service. When asked what their top supply chain priority is, 92 percent of manufacturers mention improving operational efficiency-but only 54 percent want to improve customer service, and just 23 percent aspire to reduce time-to-market. Yet suppliers of engineered-to-order goods can't afford to treat customer service and supply chain separately, and CPG firms can't expect to rush hot new products to market unless their supply chains have been tuned to produce and deliver these innovative items effectively.

U.S. manufacturers must chart a new supply chain course

With early signs of economic recovery, survival-minded U.S. manufacturers need to shift gears and reposition supply chains for growth. This means relinquishing arcane SCM practices and embracing an approach that shifts firms' emphasis from (see Figure 3):

• Absolute efficiency to lifesaving agility. Ninety-two percent of manufacturers view "operational efficiency" as their top supply chain priority-but only 4 percent mention achieving flexibility as their top objective. Yet as unplanned events, like Hurricane Mitch in 1998 or the 2002 California port lockout, become more common, firms like Dole Food Company need the operational agility to source from alternate supply bases or rapidly redirect their shipments by sea to a non-unionized port (see the March 2002 Forrester Report "Adapting To Supply Network Change").

• Functional enhancement to process optimization. Forrester found that 47 percent of consumers want to pay for custom products (see the May 21, 2003 Forrester Brief "Do Your Shoppers Want Custom Products?"). Yet, manufacturers like Mattel can't effectively capture this growing market for made-to-order products unless their functionally siloed supply chains link into sell-side processes (see the June 2003 Forrester Report "Helping Supply Chain Cope With Demand").

• Back-office enablement to customer retention. Only 54 percent of manufacturers believe that their supply chain can help improve customer service-a sphere of influence they feel is restricted to sales and marketing. But durable goods makers like Ford and United Technologies' Pratt & Whitney can't expect their customers to remain loyal if these users receive subpar repair and maintenance services-because of the OEM's poor aftermarket supply chain performance (see the September 2002 Forrester Report "Unleashing The Aftermarket's Hidden Value").

Manufacturers' IT priorities for 2004: product innovation and post-sale service

Manufacturers that want to adhere to customer-centric, agility-seeking supply chain principles must put their money where their mouth is. As they plan their 2004 IT budget, manufacturers must earmark IT dollars for process improvement initiatives that they have traditionally shunned .

• Integrating their shop floor with the enterprise. Fifty percent of manufacturers lack visibility into their plant activities, leading to engineering change-order delays and inaccurate order status reporting (see the May 2002 Forrester Report "The X Internet Makes Manufacturing Flexible"). To make shop-floor data-like assembly constraints and WIP-accessible enterprisewide and available to trading partners, firms must invest in continuous asset management tools from vendors like Opto 22 (see the July 28, 2003 Forrester Brief "How Firms Can Get Value From Physical Assets").

• Accelerating the launch of innovative products. Only 47 percent manufacturers say that IT can improve product quality-and just 26 percent expect it to drive innovative market offerings. But if consumer goods suppliers want to increase the success rate of their new products above the current 58 percent, they need PLM tools from vendors like Electronic Data Systems and Sopheon-so R&D can tap into suppliers' engineering talent and collect and act on evolving customer requirements.

• Capturing margin-enhancing service revenues. When product differentiation isn't enough to lure new customers or retain existing ones, manufacturers like capital equipment makers must use technology to make their services more competitive (see the September 11, 2002 Forrester Brief "Services Eclipse Products: An Opportunity For OEMs"). For instance, Applied Materials can invest in predictive maintenance software like that from Axeda Systems to proactively dispatch a technician to fix a budding chip equipment failure in Intel's foundry.

Please see the attached PDF for corresponding figures.