(FSB Magazine) -- The shop floor at specialty blades smells like machine oil, but nary a drop of the greasy glop can be seen. The bright, airy room is so quiet that the few scattered workers chat between stations without raising their voices. The robotic cutting machines gleam, the racks on the metal shelves are neatly labeled, the floor is pristine. Since when does the gritty world of small manufacturing look like this?
In its factory nestled in the foothills of the Blue Ridge Mountains in Staunton, Va., Specialty (specialtyblades.com) manufactures millions of blades each year, ranging from scalpels to the serrated versions that cut gas-pump receipts. The profitable company, founded in 1985, expects to see sales of $20 million this year, up 16 percent over 2006. "We are very much a growth company," says CEO Peter Harris, 38.
Harris is not alone. True, Detroit is in a slump and the entire manufacturing sector generated just 12.1 percent of U.S. GDP in 2006, compared with 17.5 percent in 1986. On top of that, manufacturing employment dropped from 17.2 million in 1996 to just over 14 million as of last year.
But manufacturing is showing distinct signs of life at the smaller end of the scale. Between 2000 and 2005 there was a 67 percent increase in manufacturing startups, according to a survey by the Kauffman Foundation (kauffman.org). That's particularly significant when you consider that fully 70 percent of all U.S. manufacturers have fewer than 20 employees. Add it all up, and small-business owners can take some credit for the increase in overall manufacturing sales, which rose by 20 percent between 2002 and 2006, according to census data.
What's driving this resurgence? One word: innovation. Not long ago the default answer to sagging manufacturing profits was to slash labor costs by moving the factory overseas. But many manufacturers now realize that offshoring doesn't always make sense.
After decades of downsizing and capital investment, labor today accounts for just 5 percent to 15 percent of total U.S. manufacturing costs, according to Susan Helper, professor of economic development at Case Western Reserve University's Weatherhead School of Management. Offshore risks include uneven quality control, communication breakdowns because of language barriers, political upheaval, and high transportation costs, not to mention the possibility that the low-cost factory in Guangzhou will steal your intellectual property to build a rival product.
The best small American manufacturers are finding ways to compete on a global scale. They are applying creative tweaks to their manufacturing processes, improving efficiency and lowering production costs. They're relying on theories and technologies that were once the exclusive province of multinationals: rapid prototyping, lean manufacturing, efficient supply chain management and better quality control. It's all about innovation, and in this U.S. entrepreneurs excel.
The best small manufacturers are adept at listening to their clients and finding creative solutions to their needs. The engineers at Specialty Blades design precision cutting devices for varied, usually custom applications. On one recent project they worked closely with a medical-device company to develop a combination scalpel and stapler that slices tissue very neatly close to the staples. The result is a less traumatic procedure, so the patient recovers more quickly. A healthier patient can go home a day early, which makes the hospital happy because squeezing in extra surgical procedures is more profitable than housing patients in recovery.
Specialty's clients are willing to pay premium prices for that level of industry-specific expertise. It's no accident that Specialty earns its highest margins on blades produced in Virginia, although the company sources some low-end products from Shanghai, where it also has a sales office. "If you sell a product that can easily be made today in China, you should expect to absolutely go out of business at light speed," says Harris. "So we focus on products where much of the value comes from the engineering of the specific solution rather than the production cost of the component."
In the hypercompetitive world of modern manufacturing, success often hinges on how fast a company can bring new products to market. Rapid prototyping is a key aspect of this process and one in which many small U.S. manufacturers excel. S&S Cycle (sscycle.com) builds high-performance motorcycle engines and after-market engine components.
Launched in 1958, S&S operates two Wisconsin factories, in LaCrosse and Viola. In 2000 the company invested heavily in cutting-edge manufacturing technology, purchasing two rapid-prototyping machines that create plastic and wax parts.
The new technology has slashed production time at the 350-employee company. Before, S&S sent drawings to a foundry that created a mold and then cast a prototype part. S&S would test the part, make adjustments, resubmit new drawings, and wait for another prototype.
"If you wanted to make a throttle body, for example, the turnaround time could be weeks," explains president Brett Smith, 35. "Now, with the AutoCAD software and the prototype machine, we can have that part in 24 hours."
S&S can now create a plastic air-intake tract, for example, and immediately put the sample part on the engine to check the fit. The part then goes to a foundry, which uses it to make the mold and cast a metal prototype. Developing complex items, such as a crankcase, used to take up to two years from concept to inventoried parts.
The new technology has compressed that cycle to as little as six months and has increased productivity by 50 percent. Smith says revenues at his profitable company have doubled over the past seven years, but won't release the numbers.
Although speed is important, it won't help sell shoddy goods. That's why smart U.S. companies focus relentlessly on quality control. Quality Float Works (metalfloat.com) is not only winning bids against Asian manufacturers but also shipping product to China, Vietnam and eight other countries.
The Schaumberg, Ill., factory makes pump floats, the hollow metal balls used to level the amount of liquid flowing through a pump. The company's floats can be found in everything from automatic coffee dispensers to the pumps that helped drain water from New Orleans after Hurricane Katrina. In 2006 sales rose 25 percent, to $2.2 million.
Quality Float follows stringent ISO 9002 and other manufacturing standards. The firm tests the eyesight of its workers regularly and inspects each part "at least three times before it goes out the door," says CEO Sandra Westlund-Deenihan, whose grandfather founded the family business in 1915 and who describes her age as "forever 21."
Westlund-Deenihan's attention to detail has paid off over the years. The last time a Quality client returned a part for a manufacturing defect was in 1992, and that was only because the client had provided an unclear blueprint specification.
Another competitive weapon in the American arsenal: geography. With international shipping costs high, U.S. manufacturers can often outsell foreign competitors on large, heavy items.
Glenn Metalcraft (glennmetalcraft. com) produces metal parts such as giant brake disks for industrial tractors or the huge cones that sit on the bottom of many semitrailers and are used for pouring grain or liquid. You make them by loading a blank of raw metal onto a lathe and then turning, or "spinning," it into the finished product.
Historically workers spun these parts by hand. But in 2002 the company hit a wall as revenues dropped to $3.1 million from $4.7 million the previous year. CEO Joe Glenn, 36, responded by purchasing a customized computer-driven lathe that could handle particularly large metal blanks. "We analyzed what we were good at," Glenn says. "We found that on the larger parts - the thicker stuff - the margins were better, and we had a knack for it."
Glenn Metalcraft also benefited from a shrewd outsourcing strategy. Joe Glenn used to order sheet metal and cut his own metal blanks. But his existing fabrication equipment couldn't handle the larger blanks that the new lathe required.
Instead of investing at least $1 million in new equipment, Glenn dumped his fabricating machines altogether and started buying blanks from fabricators near his factory in Princeton, Minn. Losing the fabricating equipment opened room on the floor for more spinning machines. Glenn retrained his fabricating workers, and now the factory runs three shifts.
Glenn's lathes must be programmed by a skilled technician before each new job. Once a lathe has been programmed, however, the cost of repeat runs drops significantly. That obviously gooses profits. So Glenn started focusing on customers that needed steady just-in-time shipments. The result? Much better utilization of capital equipment.
"Our direct labor costs used to be 25 percent of sales," says Glenn. "Today they're 8 to 9 percent." The company grew 19 percent last year, with revenues of $10 million, and projects 33 percent sales growth in 2007.
It's impossible for U.S. garment factories to compete with Asian producers, right? Wrong. True, domestic apparel production is down 46 percent since 2000. Lower overseas labor costs account for much of this plunge, but Asian manufacturers also achieve economies of scale by concentrating on huge, relatively uniform product runs.
Megan Summerville, 33, has built a thriving apparel startup on precisely the opposite strategy. Before writing a business plan to expand her small apparel company in Austin, Summerville interviewed more than 40 U.S. designers, manufacturers, and suppliers. She found demand among apparel buyers who needed to place a number of small orders (as few as 16 pieces for each design) rather than a few big orders.
Says Summerville: "These clients were tired of wait times in port, high minimum orders, and samples that were far superior to the actual product received."
Last August, Summerville bought sewing equipment from a defunct lingerie manufacturer. Today the five employees of Sew Sister Fabrics (sewsister.com) crank out a vast range of jobs on 52 separate machines, including single and double needle, serger, zigzag and labeling devices.
Summerville operates the equipment of a much bigger company, but she happily accepts low-volume orders that her larger competitors can't afford to touch. Her typical order is 100 pieces or fewer for a mix of up to six different items, completed in three to four weeks. Revenues are small but growing, Summerville says.
Sew Sister now serves 24 clients, including local designers and a few national retailers. In fact, Summerville was recently forced to turn away several potential clients until she could hire additional employees. But she has no plans to change course. "A lot of folks in this business like to get in the groove of doing the same widget over and over," she notes. "You get faster, but then you box yourself into saying, 'I am just a lingerie manufacturer,' and your other possibilities just collapse."
The larger lesson for small manufacturers? Commodity production equals failure. That's true in most industries, not just apparel. "If you're doing commodity work in steel fabrication today, you're dead," says Drew Greenblatt, 40, CEO of Marlin Steel Wire (marlinwire.com) in Baltimore City, Md.
Greenblatt should know. When he bought Marlin in 1999, the company made wire baskets for bagel shops, and offshore competitors were devouring the market. Marlin's revenues were at $800,000 and falling. Greenblatt realized he could either reinvent the company or watch it fail. He decided to start producing precision baskets for industrial applications.
One major stumbling block: Because Marlin's baskets were all hand-welded, the company was incapable of producing to tight tolerances. So he invested $1.1 million in robotic welding and bending machines run by AutoCAD software. Today Boeing (Charts, Fortune 500), Pfizer (Charts, Fortune 500) and Toyota (Charts) use Marlin baskets to send delicate parts through washing machines and curing ovens.
"With bagel baskets, it's not a big deal if you're half an inch off," he says. "But an engineer at Boeing is not going to tolerate parts slipping out of our baskets."
Greenblatt also hired two engineers and trained them to turn drawings around within 24 hours. "In 50 percent of cases I'm shipping product faster than my competitors are sending a second quote," he says proudly.
Marlin estimates that sales will hit $3.5 million in 2007, up 46 percent from the year before. "I look for the customer who needs product quick, exact and in quantities that aren't huge," Greenblatt concludes. "If you get those three, it's my sweet spot, and I'm going to beat the Chinese guy every day of the week."
Speed, precision, and flexibility are three keys to success in modern manufacturing. A fourth is the pursuit of an efficient supply chain. Consider American Bicycle Group (ABG: americanbiyclegroup.com) in Chattanooga. ABG produces titanium-frame bicycles and neoprene wetsuits. Because the best titanium it could find comes from the U.S., the company builds bikes at a factory in Ooltewah, Tenn.
Until recently the wetsuits were produced at a factory in California. The world's best neoprene currently comes from a Japanese company called Yamamoto. As a small manufacturer in California, ABG didn't have much pull with Yamamoto.
"When you're only buying 500 meters a year, you can't push them to develop something new," says marketing director Dean Jackson. So ABG outsourced production to a giant wetsuit manufacturer in China that orders Yamamoto neoprene in bulk. Production costs dropped, and ABG finally had some pull with Yamamoto.
"Everyone else had been working with Yamamoto neoprene Type 39," Jackson says. "We asked for Type 40, and our Chinese factory secured usage of that. We were first to market with this new material."
Back at Specialty Blades, Peter Harris is confident that America's small manufacturers will thrive. "Animals are very good at finding ways to make do in tough circumstances," he says. "Companies are no different. Survival is one of the most important instincts in the world, and if there's a way, they'll find it."
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