With the ever-accelerating transition to a global economy, U.S. manufacturing companies find themselves in the midst of a community of "borderless" competitors. But despite persistent alarms in the business press sounding the demise of U.S. manufacturing and the loss of American jobs, there are opportunities to maintain and capitalize on U.S. manufacturing strengths.

Getting a handle on how companies successfully and profitably navigate in this new world requires an understanding of the underlying forces at work and how they will impact different U.S. manufacturing segments. Armed with this knowledge, distributors can take proactive steps to help their manufacturing customers win in today's complex, cost-pressured environment, while focusing their own business resources on U.S. manufacturing segments that will be strong in the face of global competition.

Gotham Consulting Partners, a management-consulting firm with a focus on manufacturing companies, has researched the U.S. manufacturing sector, evaluating historical trends and the current status of the market. The company found that the notion of the U.S. manufacturing sector playing a diminished role as a key supplier of products and goods is exaggerated. There is little doubt that the challenges facing U.S. manufacturers and distributors are formidable, but there are many opportunities to carve out a sustainable substantive role for domestic operations.

The loss of more than 2 million U.S. manufacturing jobs since 2001 is an important wake-up call for the industry. Though a variety of economic factors affect employment levels, a breakdown of recent U.S. manufacturing employment trends highlights two major influences: decreasing output, and more importantly, increasing productivity. Not surprisingly, both factors relate to global competition.

Decreasing output levels are the result of flat export growth and higher import levels. With sales at their foreign affiliates expanding, U.S. companies are increasingly manufacturing abroad and relying on local suppliers, reducing their dependence on domestic production and dampening U.S. export growth. The Bureau of Economic Analysis notes that while sales of foreign affiliates of U.S. manufacturers grew nearly 35 percent between 1995 and 2001, the percent of sales these affiliates produced in the United States dropped from 11.5 percent to 10.1 percent. During that same time period, the percentage of foreign affiliates' sales imported by the United States increased from 12.4 percent to 13.5 percent.

Productivity growth, the most significant factor contributing to the employment decline, has been spurred by U.S. manufacturers' urgent need to compete with the increased volume of lower-priced imports coming out of countries with lower labor costs. Manufacturing segments with higher import competition experience higher productivity growth. An increase in productivity and lower domestic output levels mean fewer U.S. employees are needed, translating into the loss of more than 2 million U.S. manufacturing jobs.

By looking at both barriers to and enablers of imports, Gotham Consulting created the Gotham Import Susceptibility Index—a tool U.S. manufacturers can use to determine their company's vulnerability to import competition. Barriers that tend to protect U.S. manufacturing segments include: cutting-edge or proprietary knowledge; low-volume/customized products; perishability/freight sensitivity; proximity to critical raw materials; and/or regulatory requirements/restrictions. Key enablers that open the door to imports are high labor content (labor intensive) and low value-added per worker (commoditized work). In manufacturing segments where import barriers are high and/or import enablers are low, U.S. manufacturing will continue to dominate the supply role.

Certainly, there is some good news from this assessment. As shown in the chart on page 54, of today's 14.5 million U.S. manufacturing jobs, some 23 percent (more than 3.3 million jobs) are in "low-vulnerability" segments, and another 67 percent (9.8 million) are in segments characterized by medium import susceptibility, where a window of opportunity still exists to better position U.S. manufacturers for global competition. The remaining 1.4 million jobs are in segments with high import susceptibility, where much of the job loss effect has already been felt, and where strong global competition will persist.

Low import susceptibility segments—food, beverage and tobacco, petroleum and coal products, and paper—have experienced some employment decline (1.8 percent annual average decline between 1997 and 2002), but it has primarily been the result of a dampened U.S. economy, rather than productivity increases (0.9 percent increases on average in the same time frame). These numbers are in stark contrast to those four segments ranked on the high end of the import susceptibility index—apparel, leather and allied products, textile mills, and textile products—where productivity grew at an average annual rate of 5.8 percent and annual employment declines averaged 7.1 percent.

Regardless of import susceptibility ratings, the most significant advantage all U.S. manufacturers enjoy is proximity to one of the largest and most discerning markets for innovative products. U.S. companies spend more than $277 billion annually on research and development, amounting to nearly 3 percent of U.S. GDP, well over the EU average of 2 percent and the OECD (Organization for Economic Cooperation and Development) average of 2.3 percent. Additionally, the U.S. venture capital industry is much more evolved than its counterparts in Europe and Asia, and is more willing and able to invest in innovative products and technologies from entrepreneurs.

While innovation leadership is significant, import susceptibility must be considered if U.S. manufacturing is to fully leverage its strengths. Armed with an understanding of where each major manufacturing segment falls on the Import Susceptibility Index, manufacturers and distributors are better equipped to make effective decisions and align their strategies accordingly.

Companies in the low end of the Import Susceptibility Index (also referred to as "protected segments" because of their high value-add dimensions, relatively low labor content, and multiple import barriers) don't need to be overly concerned about crafting strategies to address global competition. Such segments include food manufacturing, petroleum and coal products, and beverages and tobacco. Nonetheless, given the dynamic nature of today's business environment, complacency can be dangerous, and therefore it is prudent to periodically monitor the situation to ensure import barriers are still trending high.

segments, such as primary metals, non-metallic minerals, printing and related support, chemicals, computer and electronics, and paper and paper products, must keep their ears to the ground and should take steps to stave off import inroads by reinforcing barriers and properly positioning themselves ahead of anticipated global competition. For example, in the case of printing and related support companies, proactive strengthening actions could include ensuring strong on-time delivery performance to meet customers' lead-time requirements, creating a bar that would be difficult for foreign printers to meet.

The remaining U.S. manufacturing segments unfortunately do not enjoy the protection afforded by strong import barriers and low import enablers. Players in these segments must think and act globally. Beyond innovation, the key strategies for strengthening U.S. operations revolve around segregated growth approaches and a strong and unwavering focus on customers.

In the import susceptible segments (see the top two tiers of the chart), the intensity of import competition often varies by a company's products and/or value chain, suggesting the need for segregated growth approaches. Based on a thorough analysis of the susceptibility of various portions of the business to imports, a company should develop tailored sourcing and fulfillment strategies. Product groups with medium or high import susceptibility should leverage a global supply base. For example, in the fabricated metal products business, high-volume products, such as those with standard sizes and shapes, should be globally procured, machined, assembled, and packaged. U.S. operations should focus on lower volume or customized products that need a local value chain. However, again, vigilant monitoring is critical to keep abreast of trends that might undermine this strategy (e.g., decreasing landed costs of imports, increasing foreign innovation).

In addition, developing and intensifying service strategies that anticipate and meet customer requirements (which are being influenced more and more by retailers and regulators) will strengthen and extend customer relationships, providing an important competitive advantage over imports. Here, what is important is to enhance the ease of doing business (e.g., by explicit systems linkages with customers), ensure high customer satisfaction from stellar service and delivery performance, and provide full-service solutions, rather than just individual products.

Distributors must understand the import susceptibility levels of their manufacturing customer base so they can tailor their strategies to complement and contribute to effective responses to import competition. In effect, this means partnering with manufacturers to reduce total system costs through enhanced information sharing, and by bringing expertise, working capital, and best practices to the partnership. Some distributors are making the transition by assisting in strategy and process implementation, and by providing turnkey solutions for manufacturing clients who have been forced to pare down staffing because of cost constraints. Strengthening relationships with manufacturers will provide distributors greater insight into additional ways they can provide service and become or remain a primary choice for the manufacturing customer base.

Furthermore, a good grasp of import susceptibility will help distributors focus their business resources on segments/products that are aligned with their overall business strategy. For example, should a distributor wish to pursue a niche strategy focused on protected segments or products, they will have a clearer picture of what is in this non-global category.

Through proactive monitoring of the barriers that keep import intensity low and the creation of global strategies that leverage U.S. operations for innovative and niche products, U.S. manufacturing will continue to be a significant force in a global economy. However, as the transition to a global economy accelerates, it is critical for each link of the supply chain to understand the evolution and implications on future strategy and planning. By understanding and anticipating their manufacturing customers' import susceptibility and the resulting implications, distributors can better determine the correct response for their own business and be a contributing partner in helping their customers traverse this dynamic, challenging global landscape.