Service firms have a lot to learn from U.S. manufacturing companies these days

Remember the service economy? Back in the early 1980s it was going to save us from all our troubles. Stop worrying about those shuttered steel mills, pundits like Megatrends author John Naisbitt cheerfully advised. America is making the transition from an industrial to an information economy. Manufacturing is the past; from now on, services and high tech will make us rich.

To some extent those pundits were right. As our economy advances, we are able to satisfy our need for goods with a smaller percentage of our work force. That leaves more people to work in the service economy.

But in another important sense, they couldn't have been more wrong. While many of America's manufacturers have suffered greatly from global competition, those companies that survived have adapted in ways they had never thought possible. As a result, a disproportionate amount of today's business innovation is coming from the oft-scorned manufacturing sector. During the 1980s, while much of America was busy manipulating paper in comfortable offices, successful U.S. manufacturers were learning to compete in the uncomfortable world economy.

Just look at the numbers. U.S. productivity growth was slow throughout the 1980s. It averaged 2.1% a year from 1982 through 1986, and just .5% a year from 1986 to 1990, according to Carl Thor, vice-chairman of the American Productivity & Quality Center, in Houston. Those numbers, however, mask two very different realities. While manufacturing productivity was growing at a healthy 4.7% annual clip in the first half of the decade, services were creeping along with a 1.3% annual increase, Thor says. In the 1986-to-1990 period, when growth slowed, manufacturing productivity still increased 3.3% annually; service productivity dropped .4% each year. Those numbers suggest that innovation was occurring in just the places we expected it least.

That means places like rubber factories in Tennessee. The Plumley Cos., based in Paris, Tenn., is a classic example of the changes U.S. manufacturers have had to make. Plumley has produced rubber hoses and ducts for the automobile industry for 24 years. But back in the early 1980s, as the auto companies began responding to Japan's quality challenge, Plumley's high defect rate cost it a major customer, Buick. To improve, chief executive Mike Plumley began training his workers in statistical process control (SPC), the quality-control method popularized by the Japanese. The only trouble was that many Plumley employees lacked the math and literacy skills to properly use SPC, which requires workers to monitor variations so they can immediately spot problems.

So Plumley started an education program, which has since blossomed. Today the company's employees each spend an average of one hour a month in classes on everything from basic skills to Japanese. This year all employees have begun taking a course in continuous improvement, which trains them to think constantly about ways to improve their workplace. Now the company is starting a pilot project to organize its work force into self-directed teams to analyze workplace problems.

Those changes have paid off. Plumley's reported sales have surged from $30 million in 1982 to an estimated $67 million this year. The company has received prestigious quality awards from Nissan and Ford, and Mike Plumley estimates that by next year $10 million of its sales will be to foreign-owned companies. Most recently, The Plumley Cos. won a new U.S. Department of Labor award for excellence in employee training. "Losing a major customer like Buick really told us we had to change our ways or we were going to lose them all," he says.

Because they have faced tough global competition, good U.S. manufacturers are often further along than service companies in quality improvement. That shows in the history of the Malcolm Baldrige quality award. Since the first award, in 1988, almost three times as many manufacturers as service companies have applied; for the first two years the judges awarded no service prizes at all. Meanwhile, at the American Society for Quality Control, manufacturing still represents 75% of the membership.

Quality improvement often requires a more educated work force, as Plumley discovered. Maybe that's why, when it comes to employee training, the average manufacturing company outspends business-, health-, and educational-service companies by 20% to 40%, according to Lakewood Research, in Minneapolis. Manufacturers also spend 80% more than the retail and wholesale trade.

When it comes to soliciting employee involvement, manufacturers also appear to do more. Consider today's latest management trend, self-managed work teams. Manufacturers are about twice as likely as service companies to try such teams, estimates Richard Wellins, author of Empowered Teams.

Those changes in management attitude amount to a revolution in American manufacturing practice. Jeffrey Miller, a professor at Boston University, has been surveying U.S. manufacturers throughout the last decade. He concludes that the trend toward employee involvement in manufacturing is pervasive, and he believes it has more to do with economics than enlightenment. Japanese companies, which valued the ideas of low-paid production workers, turned out to have a decisive economic advantage over U.S. companies, which sought ideas only from highly paid managers. Competition forced U.S. manufacturers to realize that involving their low-level employees in decision making saves money on overhead -- so they're doing it. "Like good capitalists, we've responded in ways that make business sense -- and then we call it participative management," Miller says.

Of course, it's not as if American manufacturers had all the answers; many of them are learning from service companies about improving customer satisfaction, for example. By all accounts, most U.S. manufacturers have in fact been woefully slow in adapting to the changing business environment. Still, painful as the problems of the U.S. manufacturing sector have been, they offer an invaluable opportunity to the rest of us. After all, if we can learn from manufacturing's experiences with foreign competition, maybe we can avoid repeating them.

Executive Digest


* The trendy management concept of "internal customers" can be dangerous to a company's health. So argues consultant and professor Oren Harari in Management Review (July). In the current chaotic marketplace, Harari writes, businesses can't afford to have people worrying about serving other departments; that encourages complacency among -- and barriers between -- different parts of the organization. "Serving internal customers is a distraction and a means of deflecting creative energy from the vital [external] targets," he says.

* How aggressive have lawyers become at drumming up lawsuit business? Across the Board (July/ August) reports that some are syndicating lawsuits -- especially patent ones -- to investors, who foot the up-front legal bill for a cash-poor client in return for a share of any settlement. The magazine also describes a Los Angeles bank that, with the local trial lawyers' association, has developed a line of credit to cover a client's lawsuit costs. As collateral, the bank gets a lien on any winnings.

* The states are keeping accountants busy -- both by raising business taxes and by collecting them more aggressively. Accounting Today (July 8) observes that state business taxes are becoming so complex that interstate tax compliance is a booming business for CPAs. One big problem area? Tax advantages for S corporations vary widely from state to state.

* A small California company has come up with a way to offer cheaper pay phones. Telephony (July 8) reports that by taking advantage of volume-discount rates, Quarter Phone Connection, of Woodland Hills, Calif., is able to offer calls anywhere in the United States for 25¢ a minute. Quarter Phone reported installing 260 phones since February, mostly in California and Florida; it plans to go national next year.

* New-business-formation rates are down, according to "The Small Business Advocate," a newsletter published by the U.S. Small Business Administration's Office of Advocacy (June). According to data collected by Dun & Bradstreet, the number of new businesses incorporated dropped 4.3% in 1990. (See FYI, October 1991, [Article link].) Hardest hit were New England (down 11.2%) and California (down 19%). The Pacific Northwest (Alaska, Idaho, Oregon, and Washington) and the South Central region (Arkansas, Louisiana, New Mexico, Oklahoma, and Texas) were the only areas to show increases.

* Watch out, service companies! Countries in Asia are increasingly emphasizing services over manufacturing, according to Asian Business (July). "The era of the Asian service multinational has begun," the magazine proclaims. It also suggests that Asian governments must deregulate service sectors and open them to foreigners if the sectors are to thrive. But that presents other difficulties: for example, many Asians fear that their societies will be corrupted by American-style lawsuit proliferation if they open their markets to foreign lawyers.