A pure Free Market strategy isn’t always in the best interests of our country.
Anyone that’s read my column over time knows that in OEM supplier negotiations I am an advocate of finding the middle ground and making the pie bigger. Why? Because I know from experience that if an OEM and its suppliers are open to working together to find optimal solutions, both usually end up with most of what they wanted in the first place. On the other hand this approach usually takes more time and effort than a strict imposition of leverage.
I’ve found this strategy also works well in resolving conflicting views—which, after all, can be thought of as a type of negotiation, including those involving political issues. The best example I’ve seen of this was when Ronald Reagan (a Republican) was President and Tip O’Neill (a Democrat) was Speaker of the House. They decided the best way to serve the American people was to look for the middle ground and, as a result, during their joint-tenure Congress passed a lot of constructive laws based on bipartisan support, including the last rewrite of the tax system. After O’Neill retired, Reagan—to both honor his patriotism and recognize his openness to middle ground solutions—named him Ambassador to Ireland, i.e., Tip’s ancestral home.
The purpose of the IdeaXchange is to facilitate manufacturing-related dialog. IndustryWeek should be given kudos for sponsoring this forum. I—and I suspect most IdeaXchange authors—really enjoy sharing ideas and receiving feedback on them, which usually take the form of constructive alternative points-of-view. That’s what exchanging ideas should be all about.
There will always be competing outlooks. But as we saw under Reagan and O’Neill, they don’t have to lead to rancor and derision which, unfortunately, they seem to in many of the IdeaXchange articles which posit governmental involvement in business. Much of this feedback seems to take more of an “us-vs.-them” tone rather than a “looking-for-middle-ground” tone. In fact, the impetus behind my writing this specific article is some of the feedback to a recent article, “First Look at Trump Budget Isn’t Pretty: Commentary”—an article that, by the way, except for its title was—in my opinion, anyway—well-founded and not really that controversial.
I worked in manufacturing for over 40 years and held executive level positions. I understand what competition is all about as well as what it takes to successfully compete. I found very few business issues where the solutions were binary, i.e., one-way-or the-other. This implies that development of optimal solutions requires finding middle ground. Unfortunately, on the issue of government involvement in business, most Free Market extremists—whom I label as Uber Freemarketeers—seem to believe in a “my-way-or-the-highway” world. In their world, if you don’t support a total survival-of-the-fittest economic construct you are a socialist or, worse yet, a communist. Most of the negative, non-constructive comments I’ve seen on the IdeaXchange seem to be from these Uber Freemarketeers.
I’ve got news for you. As much as you wish it was so, a pure Free Market strategy isn’t always in the best interests of our country. I’ll make this point by laying out one of Trump’s proposed budget cuts that was discussed in the above-cited article. It relates to a federal program that is proposed to be zeroed out—the Manufacturing Extension Partnership (MEP).
The congressional charge of the MEP is to provide subsidized support to small- and medium-sized manufacturers to help them more effectively compete, primarily against foreign competition. Last year, MEP centers interacted with 25,445 manufacturers leading to $9.3 billion in increased sales; a $1.4 billion reduction in cost; $3.5 billion in client investments, and helping create and retain more than 86,000 jobs. MEP services are not a free-ride. The client pays over 50% of the cost of the support, with the federal and state governments covering the rest. The program’s impact is even more impressive in view of the payback on the federal investment. Specifically, its annual budget is $130,000,000—a small amount in the big picture of things—and last year for every $1,501 of federal investment, the MEP created or retained one manufacturing job.
It’s hard to argue with numbers like those cited above, but the Uber Freemarketeers do and that’s the basis behind the proposal to eliminate federal MEP funding. Their counter-argument to having the MEP is that there is no need to provide federally subsidized manufacturing support since private sector—free market—consultants are available. This is true. But what also is true is that these consultants are either not accessible to the little guys or, when they are, many times aren’t worth their fees. Let me explain.
In my seven-part series on Next Generation Lean last fall I laid out the premise that Lean consultancies can be classified in two ways: experts and all-the-rest. I should mention that after working for OEMs for 30 years I spent the last 10 years of my career as a consultant, so I am familiar with the field. On the plus side my experience is that expert class consultancies are worth every dollar invested in their services. However, it is a reality that these consultancies are the exception not the rule, and that they are seldom interested in accounts where contracts are not well into six figures. This means that expert class consultants are not affordable to small- and medium-sized firms.
On the other hand, I have seen far too many instances where the impact of all-the-rest consultant engagements wasn’t worth the cost, time, or effort. I’ll give you an example of what I mean. Several years ago I was visiting a supplier to one of my clients. By coincidence, this visit occurred on the same day that they were bringing in what turned out to be an all-the-rest consultant.
During my visit I had the opportunity to take the consultant aside and question him about his background and employer. I discovered that he worked in industrial outreach for a local technical school and had both undergraduate and Master’s level degrees in business as well as a certificate in Lean. And, while he had been providing consulting services for his employer for almost two years he had never actually worked in private industry. In other words, he lacked a degree from the “school of hard knocks.”
This raised a red flag with me since most expert class consultants I’ve met have underwent extensive experience in private industry prior to putting up their own consulting shingle. The consultant went on to tell me that he had been brought in by his client to implement Lean and that he was hoping to have his first kaizen event completed within a week. I asked what area the kaizen would focus on and he told me he wasn’t sure yet but they’d come up with something. Hmmm.
The technical training school he represented was subsidized by federal, state and local tax dollars, making the cost of their industrial support affordable, i.e., certainly under six figures. At the end of the engagement, though, the engagement resulted in minimal financial impact and the owner of the company (who I developed a good working relationship with) told me that based on this experience he would never, ever bring in another consultant. My purpose here isn’t to bad-mouth technical school industrial outreach programs, but rather to make the following two-points:
• The experience of the consultant is more important than their degrees or the name of the institution/consultancy they represent.
• The only reason why the supplier was able to hire this consultant was because of the state and local subsidies.
So what is different between MEP and typical subsidized all-the-rest type consultants? While their fees are roughly the same, most MEP personnel either have extensive experience in private industry or access to a mentor that does. In other words, MEP’s clients can be assured they have a good chance of having an expert practitioner experience, i.e., one that delivers measureable financial benefit. And, as they say, the-proof-is-in-the-pudding so it is pertinent to point out that the vast majority of MEP engagements result in future repeat engagements, based on the success of the earlier projects.
Uber Freemarketeers take the position that if a manufacturer can’t afford an expert consultant—and consequently, can’t keep up with modern manufacturing practices—they don’t deserve to survive. I guess there is some merit to this argument if looked at on an individual basis. But in a big-picture sense it doesn’t make a lot of sense to have a U.S government manufacturing strategy that allows our country’s small- and medium-sized manufacturers—along with the wealth and jobs they create—to go the way of the dinosaur.
I saw first-hand the effects that a lack of a supportive government policy can have on small- and medium-sized manufacturers during the 1990s and early 2000s. It was during this era when much of corporate America was outsourcing work from domestic to offshore suppliers. And for the most part—at least from my seat in the ballpark as an OEM purchasing manager—our federal government stood on the wayside expecting these firms to compete on-their-own against not only foreign competitors but also the governments of the countries they were located in (and some of these countries blatantly subsidized them in a variety of ways—for an example of this see my previous column, “Why the US Government Needs to Be Engaged in Economic Development”).
During that time the only governmental support this class of manufacturer had access to for assistance in competing was the MEP. And I know from personal experience that during this period MEPa helped many of my company’s suppliers remain in business, which meant that my employer could keep sourcing in the ”good ol’ U.S. of A.”
In spite of this, the Free Marketeers influenced the George W. Bush administration to cut MEP funding by almost 50% in their 2004 budget proposal. That didn’t last long as the outcry against the cut quickly reached a crescendo and the next year—also under Bush—original budget levels were reinstated. Now we’re on the cusp of this happening again. Don’t we ever learn?
In my mind the bottom-line question here is whether the United States should have a strategy of providing support to its small- and medium-sized manufacturers or let them fend-for-themselves against foreign firms and their governments? Again, we’ve been there before. That second option will lead to a continued decline of our manufacturing infrastructure along with massive job losses. The point, then, should not be whether to close down the MEPs but rather to ask how additional government support can increase their effectiveness.
I will say I also find it interesting that other types of government involvement in business don’t seem to faze these same Uber Freemarketeers. I’ll give an example. A few years ago I had a long-term engagement in Houston while working for a major player of oil extraction equipment. Houston is the home of most of our nation’s oil production corporations. In fact, if you go into a restaurant in a certain part of town after work you’ll likely run into employees of these companies. That’s how I met a group of people from one such company in one restaurant’s bar one evening. When I offered to buy a round of drinks they invited me to join them at their table.
After introductions they all wanted to hear about my consultant gig, which I filled them in on to the extent that my confidentiality agreement allowed, i.e., the company these guys worked for purchased a lot of equipment from my client. I then asked them about their roles and found that they were working on some pretty interesting projects. At the end of the evening I told them I had one more question regarding their business.
As part of the due diligence in working for my client I had reviewed the annual reports of several of their biggest customers, including the employer of my bar-mates. I complimented them saying that I had found their company to have one of the healthiest sets of financial exhibits I had ever seen which, by the way, they very much liked hearing. Then I went on to ask—in view of this—why had the U.S. Congress recently seen fit to subsidize them to the tune of several billion dollars? The initial response to this question was a lot of nod-nod/ wink-wink around the table. In the end, though, one of the guys acknowledged the subsidy by saying it had sure made things a lot easier. Hmmm. Are government subsidies really meant to make things easier for financially healthy companies?
I think I understand why Congress subsidizes oil companies. It is because the U.S. has a strategic goal of ensuring our country access to low-cost fuel. And I’m sure that subsidies to oil and gas corporations also result in additional investment and jobs. But that begs two questions:
• Should the U.S. also have an economic strategy of ensuring the ongoing viability of our small- and medium-sized manufacturing base such that U.S. OEMs retain access to local suppliers?
2) What is the return on investment of those oil company subsidy dollars compared to that of the federal government’s investment in MEPs?
Based on the impacts cited above—which, by the way, were figured by independent auditors—the MEP system is well worth its federal funding. In fact (and I admit I have no numbers to back this up), I suspect the return on the MEP subsidy is at the same level of or greater than the return of subsidies given to the oil companies. And I don’t see Uber Freemarketeers—including anyone in the Texas congressional delegation which, by the way, can for the most part, be classified as belonging to that group—complaining about them!
I admit that I think there are things that the MEP system could improve on, such as how they leverage OEM supply chains. But overall, it is a good investment of tax dollars and it should be entirely acceptable in an IdeaXchange article to bring up the position that elimination of MEPs would be against the best interests of our country without receiving deprecatory feedback. I’ll add that I guess I’m one of those people who believe the manner in which an individual expresses disagreement with others tells you a lot about the character of that person.
My next article will focus on a successful instance of both finding the middle ground and increasing the size of the pie from my days as a procurement engineer, i.e., technical buyer. It will also relate a supplier effort above-and-beyond what could normally be expected in selling the proposal to management.