With a little innovation, who needs outsourcing? (cont.)

By Phaedra Hise, FSB contributor

Spatial awareness

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.

Smaller, faster, better

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."

Find your niche

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."

Build where you buy

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." Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.