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Blog Category: Chief Economist Sue Helper

Reinvesting in America’s Supply Chain Innovation

Reinvesting in America’s Supply Chain Innovation

Guest blog post by Sue Helper, U.S. Department of Commerce, Chief Economist

It’s springtime, and during this season of growth and renewal another important renaissance is underway: a remarkable resurgence in American manufacturing.  Powering this growth are the small- and medium-sized businesses that comprise the U.S. manufacturing supply chain. 

President Obama in his State of the Union address earlier this year committed to supporting these small businesses.  This week, in Cleveland, OH, he made good on that promise, announcing a series of key manufacturing initiatives.  Additionally, a new White House-Department of Commerce report was released that examines the importance of reinvesting in America’s supply chain to enable innovation.  The report, “Supply Chain Innovation: Strengthening America’s Small Manufacturers,” identifies potential barriers as well as solutions – laying the path toward sustained manufacturing growth and strength, at home and abroad, now and into the future.

As described in our report, the resurgence in manufacturing has seen the addition of 877,000 jobs added since February 2010. Small firms play an increasingly important role in U.S. manufacturing, and now account for almost half of America’s manufacturing employment. Dense networks of these small manufacturers are vital to the process of taking a product from concept to market, and sharing manufacturing expertise along the supply chain is essential for the diffusion of the new products and innovative processes that give U.S. manufacturing its cutting edge. 

However, these small firms face barriers to innovation, a key element in strengthening U.S. competitiveness. While firms with fewer than 500 employees comprise 98 percent of all manufacturing firms, together they account for less than one-third of private-sector research and development (R&D) spending in manufacturing.  And because of these barriers to innovation, in their operations, small manufacturers are less than 60 percent as productive as their larger peers. Moreover, lack of innovative capability impacts small suppliers’ customers: the quality of end products is compromised and it takes longer for innovative technologies to get to market.

Customer firms have a critical role to play in cultivating the capabilities of small firms in their supply chains and encouraging fruitful cross-pollination of expertise across firms.  However, larger firms often under-invest in their suppliers because they fear improvements they pay for may end up benefitting their competitors, and because of conflicting internal goals.

Businesses Commit to Alleviate Their Suppliers’ Capital Costs

Businesses Commit to Alleviate Their Suppliers’ Capital Costs

A recently released Department of Commerce report, “The Economic Benefits of Reducing Supplier Working Capital Costs,” highlighted how much the viability of our nation’s supply chain depends on large firms paying on time.  Our small manufacturing firms—which account for more than 1/3 of manufacturing shipments and close to half of employment—face elevated capital costs, relative to large firms, because of lack of access to loans and higher interest rates.  Large firms exacerbated these constraints through the Great Recession when they delayed payment for the good they ordered.  The economic recovery has not seen these times drop; indeed, one study found that corporate payables increased from an average of 35 days in March 2009 to 46 days in July 2014.

Cutting these times is not just good corporate citizenship.  It makes good economic sense, as the new report outlines.  With less working capital, suppliers’ ability to innovate or invest in their workers is inhibited, leading to lower quality goods and services. They may recoup the shortfall by raising prices, but this is not necessarily an option if they are competing with other suppliers. In the worst case scenario, they may exit the market, leaving a hole in the supply chain. Thus, an increase in suppliers’ working capital costs may ultimately accrue to the large buyer, in the form of lower quality goods and services, less stable suppliers that create risk for the buyer, and/or higher prices because of less productive suppliers.

Just last week, leaders from corporate America met at the White House to collaborate and help their suppliers succeed under the umbrella of the Administration’s SupplierPay. This initiative encourages large businesses to pay their suppliers more quickly to promote small business quality, growth, and innovation. Corporations can help suppliers avoid expensive, difficult to obtain bank loans, or other even more costly financing options. Since the SupplierPay Initiative began earlier this year, 47 companies have taken the pledge to pay their suppliers faster. These companies joined together at this week’s event to network, swap ideas, and exchange lessons learned as they take steps to help increase their suppliers’ access to working capital.

 “When buyers pay their suppliers faster, they both benefit,” said Commerce Department Chief Economist Sue Helper.  “This in turn allows suppliers’ working capital to be put to work for the benefit of the larger economy—their large customers included. Buyers also receive bottom-line benefits and fulfill their corporate social responsibility to their suppliers.”

New tool shows manufacturing in America carries huge potential savings; a reshoring success “toy story”

New tool shows manufacturing in America carries huge potential savings; a reshoring success “toy story”

Guest blog by Dr. Sue Helper, Chief Economist, Economics and Statistics Administration

This week, as we celebrate the country’s vital manufacturing sector, we are excited to unveil a new tool that will allow manufacturers to calculate potentially significant savings that can be realized by manufacturing in America.

With the first iteration of Assess Costs Everywhere (ACE), we assisted manufacturers in deciding where to locate their operations by examining 10 cost and risk factors they should consider.  This week, we present “the Cost Differential Frontier,” or CDF, as part of ACE 2.0.  Developed by economists at the University of Lausanne, this calculator serves as a framework to consider total inventory costs and risks. 

ACE 1.0 examined factors such as labor; trade financing and regulatory compliance costs; product quality; shipping; travel and oversight; inventory; intellectual property; political/security risks; and other inputs to gain a better understanding about the sometimes hidden costs associated with manufacturing location decisions. Great work is underway to further our understanding of the financial implications of these factors.  Applying CDF, businesses for the first time can quantify potential savings that would be derived from reducing lead time, in conjunction with other factors. 

Because customer demand often fluctuates unexpectedly, companies should carefully consider the value of a domestic supply chain with shorter lead times.  Using offshore suppliers increases the time between order and delivery, often by months. As a result, the buyer must place the order based on a forecast.  As the lead time gets longer, the range of demand levels that must be considered becomes wider.  These fluctuations lead to costly stock-outs or overstocks.  The savings from offshoring may need to be large (20 percent or more) to compensate for these mismatch costs between supply and demand. Applying CDF, manufacturers can calculate exactly how the long supply chains and uncertainty add large hidden costs to production.

Moreover, real-life examples such as the successful reshoring story of U.S. toy manufacturer K’NEX demonstrate that the promise of ACE is more than just theoretical. Indeed, with ACE and CDF, a truly compelling case for reshoring is emerging.

Manufacturing: A New Commerce Department Report Shows Renewed Expansion

Guest blog post by Dr.Sue Helper, Chief Economist, U.S. Department of Commerce

The U.S. manufacturing sector is rebounding at a rate unseen since the late 1990s.  For the first time in more than a decade, output and employment are steadily and simultaneously increasing. A new Commerce Department report, Manufacturing Since the Great Recession, provides an overview of the resurgence of this important economic sector, examining production, international trade and the labor market.

Some of the key findings included in the report are:

  • Manufacturing output has grown 38 percent since the second quarter of 2009 when the Great Recession ended, and accounts for 19 percent of the rise in real gross domestic product (GDP) since that time;
  • From March 2010 through May 2014, the manufacturing sector has added 646,000 jobs with an additional 243,000 positions yet to be filled. This is more than a cyclical rebound; the US has gained about four times as many manufacturing jobs since 2009 as would be expected from cyclical factors alone; and,
  • In 2013, average annual weekly hours for production workers in the manufacturing sector were at their highest level since the mid-1940s.

Manufacturing jobs are good jobs: workers earn 16 percent more in manufacturing jobs (in combined wages and benefits) than they would elsewhere. Not surprisingly, quit rates are also lower than in any non-government sector.