Why is production a critical component of any business? Companies strive to make a profit by providing goods or services to consumers. To increase their profits and decrease their production costs, businesses must find the most efficient production process possible. To remain competitive in the global economy, U.S. manufacturers and service organizations need to monitor their operations and production processes to ensure they are customer focused, quality driven, economically efficient, and technologically savvy. This necessitates managing each component of the production process from beginning to end, including developing tighter relationships with suppliers.

How important is manufacturing in the United States? Manufacturing remains a fundamental component of the U.S. economy. In fact, manufacturing has been the largest contributor to the U.S. real gross domestic product (GDP) despite significant increases in imported goods and related job losses over the last two decades.

Part of the reason why manufacturing contributes significantly to GDP is the substantial amount of commodities and services the manufacturing sector requires to produce goods. Manufacturing also generates many other service-based economic activities: the transportation of goods, the production of software needed to assist with the processes used to make the goods, and their marketing, advertising, and selling.

How important are services to the U.S. economy? Despite the ongoing importance of the manufacturing sector, the United States, like most developed nations, has transitioned from an industrial-based, manufacturing economy to a service-based economy. Services make up nearly three-fourths of the U.S. GDP, and more than 75 percent of jobs are in the service sector. Service businesses, such as health care, education, child care, retail operations, and information industries are often easier to start because they require less capital than manufacturing businesses, which generally need to or rent or purchase real estate, factories, and equipment. Additionally, transportation and utility companies are service based and are important to the U.S. economy.1

We may think of service businesses as being the small mom-and-pop stores in our neighborhood, but not all service businesses are small. Ten of the 30 firms that currently make up the Dow Jones Industrial Average (DJIA) are in the service sector. They include American Express, Cisco, Disney, Goldman Sachs, Home Depot, JP Morgan Chase, McDonald’s, Travelers, Verizon Communications, and Walmart. Some companies are considered to be both manufacturing and service based. GE and IBM, also on the DJIA, are considered to be the largest and most competitive service operations in the world. Both have manufacturing components.

How does U.S. manufacturing compete globally? When you look at the country-of-origin labels on the products you use, most of them have probably been made in a foreign country. Consequently, it is hard to imagine that the United States is still a globally important manufacturing country. Although the United States is the world’s largest importer, it is also the third-largest exporter. The United States exports approximately $1.5 trillion worth of goods, annually.2 They continue to manufacture and export a lot of high-dollar products. Nearly one-half of U.S. exports are goods such as transistors, aircraft, motor vehicle parts, computers, and telecommunications equipment. Industrial supplies, such as organic chemicals, account for another one-fourth of U.S. total exports, and consumer goods, such as automobiles and medicines, make up another 15 percent.3

How does manufacturing affect the global economy? Over the past few decades, U.S. companies reduced their costs by offshoring production to third world or developing countries, such as those in Asia and Africa, to take advantage of lower wage rates. Offshoring has contributed to the decline in U.S. manufacturing and the increase in unemployment. However, on a global basis, offshoring production to third world countries has helped to improve their standards of living, which in turn contributes to the world’s economic growth. Despite offshoring the United States still has the highest GDP globally.4

In recent years, some changes in the global manufacturing competitiveness of many countries, including the United States, have occurred. According to the Global Manufacturing Competitive Index, China remains the most competitive manufacturing nation followed by the United States, Germany, and Japan. Lower-wage countries, such as Taiwan and Mexico, which have not traditionally been large manufacturing nations, now make the list.5

What changes in production will keep the United States competitive? The Global Manufacturing Competitive Index predicts a shift in the next ten years, forecasting the United States would be the most competitive in manufacturing, followed by China. Some foreign-based companies, such as Lenovo, the Beijing-based computer manufacturer, are opening new facilities in the United States, and American companies, such as Caterpillar, GE, and Ford, are bringing some manufacturing operations and jobs back to the United States. In addition, U.S. manufacturers are using practices such as enterprise resource planning, computer integrated manufacturing, flexible manufacturing, and lean manufacturing, which we will discuss later in the chapter, that continue to improve the manufacturing process. Service-based organizations, including Nordstrom and the Ritz-Carlton, have learned from manufacturers and are using modified versions of the same practices to improve their offerings. McDonald’s, Disney, and Federal Express, for example, have well-developed quality management programs similar to quality improvement techniques found in manufacturing firms.