Manufacturing Sector
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Industry Overview
The US manufacturing sector includes about 300,000 companies with combined annual sales of about $4 trillion. Major manufacturers include GM, Ford, GE, IBM, Boeing, Hewlett-Packard, Proctor & Gamble, Merck, Cisco, and DuPont. Although some companies like GE participate in many manufacturing sectors, the specialized nature of most manufacturing processes requires companies to specialize in a few types of products. Concentration tends to be high in those industry segments that produce basic commodities, like steel or fertilizer, or that require high degrees of engineering, like car or plane manufacture.
Competitive Landscape
Most sales by manufacturing companies are to other manufacturing companies. Profitability depends on efficient and cost-effective manufacturing operations and distribution. Small companies can compete by producing specialized products or selling into specialized markets. Large companies have advantages of scale in procurement, production, distribution, and marketing. Average sales per employee vary greatly due to the large variety of products in this sector.
Products, Operations & Technology
Major products of the US manufacturing sector include transportation equipment, computers, electronics, food, chemicals, machinery, and products made of metal, plastic, and paper. Annual revenue for manufacturers of cars and planes is about $600 billion; computers and electronics, $450 billion; food, $425 billion; chemicals, $425 billion; machinery, $300 billion; metal products, $250 billion; plastics, $165 billion; and paper, $150 billion. Annual revenue of manufacturers equals that of the wholesale trade sector, and is four times larger than healthcare and construction. The net output of the manufacturing sector is about $1.5 trillion, or 16 percent of the US gross domestic product.
Manufacture usually involves transforming raw materials, including unfinished products and components, into altered configurations, using energy, machines, and labor. Raw materials may be minerals or other mined materials (iron ore, petroleum feedstock); materials grown as crops (cotton, rubber, foods); or materials that have already been processed (steel bars, plastic pellets, electronic components, car subassemblies). The processes of transformation are conducted with varying degrees of efficiency by different companies. Because of relatively high US labor costs, manufacturers of labor-intensive products often locate manufacturing plants in less-expensive countries.
Specialization by function has proven to create some of the greatest efficiencies, so that companies efficient at producing steel, for example, don't usually also produce cars or other items that contain steel. Few successful manufacturing companies in the US today are vertically integrated; in other words, few produce everything from raw materials to intermediate products to finished goods. A result of specialization by function is that most sales by manufacturers are to other manufacturing companies. Specialization often allows a manufacturer to have expertise in manufacturing similar products or products with similar uses. For example, a horizontally integrated company might produce nails, bolts, screws, washers, nuts, staples, clamps, wires, chains, glues, tools, and other fastening devices.
The manufacturing process produces goods with varying degrees of quality and waste. A top operating priority at most manufacturing companies is increasing the yield of high-quality products, which also reduces waste. Quality control ensures that only products of good quality are sold, and requires that products be tested after manufacture. Various basic methods of manufacture are used, depending on the product, including continuous process and batch operations. Continuous process operations, such as assembly lines, have proven to be the most efficient way to produce a product, with economies of scale increasing when greater volume of product is produced. These economies of scale have driven companies to grow to produce greater quantities of product at lower unit cost.
Manufacturers typically own a single production plant, machinery, and other equipment, a warehouse, and sometimes delivery trucks, all of which need to be maintained, upgraded, and periodically replaced. Labor management and relations are keys to efficient operations, especially job training and minimizing employee turnover. Research and development are essential for most manufacturing companies, both to develop new products and streamline production of existing products.
Smaller companies are more likely to outsource functions such as payroll and human resources. Most smaller manufacturers are privately held corporations, but the large amounts of capital needed for plant and equipment in big operations leads most large companies to sell shares to the public.
Manufacturers use a variety of computer systems to manage supplies and operate the manufacturing process. Just-in-time (JIT) procurement systems allow automatic ordering and replenishment of parts and supplies when onsite inventory dips below a specified level. JIT manufacturing systems link to order systems, so that a customer order triggers the manufacturing process. Shop floor systems automate production. Logistics and JIT delivery systems provide similar streamlining to ensure efficient supply and delivery networks.