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Many economists are forecasting local manufacturing revenue growth this year to be flat or down, in part because of a world capacity glut in various manufacturing sectors. However, San Diego’s 4,200 small- to medium-sized manufacturers will find that revenue growth is not the only way to increase profits. "Hidden profits" are there to be found in the operations of more than 90 percent of manufacturers. The process already has begun.
Local manufacturers will employ such production and profit-enhancing methods as "lean" manufacturing, embracing quality systems such as ISO 9000 certification and improving their information technology systems, with the catalyst for improvement being the looming Y2K threat.
ISO 9000 Certification Increases
Two key questions being asked by San Diego’s manufacturers: "What are the changes with NAFTA?" and "How can my company capitalize on those opportunities?" We are telling clients and prospects the first step to take before they consider getting into the NAFTA game is to seriously evaluate their quality systems. Local companies that want to sell to maquiladoras almost certainly will need to become ISO 9000 certified.
Created by the International Organization for Standardization, ISO 9000 is a series of three international standards and guidelines on business management and quality assurance which were first published in 1987 and revised in 1994. ISO 9000 standards do not apply to a specific product, but instead provide a business process model for organizations which design, produce or test products. Since the standards are not specific to any particular product, they can be used by both manufacture and service industries. That's the technical definition. From a practical standpoint, ISO 9000 is a collection of good business practices — things that manufacturers should probably be doing anyway. It’s a way for large and small companies to identify problem areas, streamline their operations, establish constituent process methodologies and then improve their overall quality and efficiency.
Companies that are ISO 9000 certified seem to share certain traits that translate into higher profitability — they have less turnover because the stress level on employees is lower; absenteeism is significantly reduced; productivity is dramatically increased; and scrap, waste and overtime can be measurably, and in many cases, significantly reduced.
'Lean' Manufacturing Blooms
This year the pressure is on for San Diego companies to learn new manufacturing practices that make them more profitable. New emphasis on the elimination of waste has created exciting breakthroughs in the search for manufacturing excellence and higher profit margins.
One such breakthrough technique is lean manufacturing, which means building to consumption — not to a forecast — to produce just what is needed, as soon as it’s needed. Lean manufacturing includes production methodologies that eliminate waste and nonvalue-added process steps. Lean manufacturing also helps eliminate inventory stockpiles that tie up valuable financial and physical resources and limit a company’s flexibility. Lean manufacturing derives its name from the manufacturing systems and processes implemented at Toyota Motor Manufacturing that are so effective at producing low-cost, high-quality products and short cycle times. In addition, these systems are highly flexible and responsive to customer requirements.
The transition to lean manufacturing follows closely on the heels of ISO 9000 certification. When a manufacturer puts a business quality system in place, the ability to simplify and speed up the production process becomes much easier. Lean manufacturing can be fully embraced with astonishing impact on the bottom line.
Y2K As A Positive Catalyst
The millennium bug will be the catalyst for San Diego manufacturers to evaluate their entire information technology systems.
Despite widespread publicity concerning the Y2K problem, many local manufacturers are unaware of how it can affect their businesses. Every manufacturer will need to take steps to identify where they may be vulnerable.
Our clients already are taking an inventory of all of their hardware, software, data and the embedded systems that exist throughout their companies. We also are encouraging them to look at their operational requirements and relationships with suppliers and customers outside the company. They also are contacting vendors and suppliers of inventoried items and asking them to provide a written statement verifying that each item (hardware, software or service) is Y2K-compliant (otherwise, they should be offered an upgrade or replacement product).
In many cases vendors may not have an upgrade or may no longer support the product. Manufacturers will face a difficult decision and will be weighing the costs and benefits of either rewriting the custom code to become compliant or replacing their programs with a Y2K-compliant application. Just as a company would confirm Y2K compliance of products, they should confirm the compliance of service providers. If their payroll, accounting, insurance, financial, utilities, and other providers cannot verify their compliance or state of compliance, manufacturers should consider alternative outsourcing arrangements.
Unfortunately, some small- and medium-sized manufacturers will ignore the Y2K problem and as a result run the risk of serious problems or possibly even going out of business. There are several reasons why this may happen. They may lose critical data necessary for daily business operations. Problems with environmental controls, telecommunications, utilities, security systems or production automation machines may force temporary plant closures. Failures with manufacturing operations, shipping, invoicing, processing or receiving orders and payments will threaten client relationships, because the confidence level will drop. SanMEC is offering an inexpensive Y2K self-assessment tool that was developed by the National Institute of Standards and Technology and KPMG Peat-Marwick. The tool will help manufacturers identify the high-risk problem areas and point them to the steps necessary for timely remediation.
Taking positive steps toward Y2K compliance, adopting lean manufacturing standards and becoming ISO certified will help manufacturers uncover their hidden profits in the new year and beyond.
Frederick Brunn is president of the San Diego Manufacturing Extension Center
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