Manufacturers Find Themselves Increasingly in the Service Sector

PITTSBURGH -- The manufacturing sector is morphing into the service sector, at great reward and risk to the economy.

In recent years, manufacturers have so greatly improved productivity that companies need fewer people to actually produce goods. Many other production jobs, especially low-skill ones, have been shipped to lower-cost countries. The result has been painfully clear to workers: Those type of manufacturing jobs are fast disappearing.

But what isn't so well understood is this: Of the workers still employed by manufacturing companies, a growing proportion can be found in cubicles instead of on the factory floor. In fact, of the 17 million jobs still left in the U.S. manufacturing sector, about 52% are involved in the actual production of goods. The rest are consumed by engineering, design, sales, marketing, consulting, logistics and support -- i.e., service jobs. A decade ago, 68% of manufacturing jobs involved actual production.

Michael Summers, president of Cleveland-based Summers Rubber Co., which fabricates hoses for ice-cream manufacturers, chemical plants and steelmakers, says it is no longer enough to just get a product through the pipeline and delivered. His engineers can ensure a hose is the right design for the customer, track a product's lifetime and perform root-cause analysis if the hose fails. "Our business is increasingly a service business. In my grandfather's era it was a product business," says Mr. Summers, who took over the business, which his grandfather started in 1949, from his own father.

Thomas J. Duesterberg, chief executive officer of the Manufacturers Alliance, a research and trade group based in Arlington, Va., says the distinction between goods and services is blurring: "Given the demands of global competition and increasing sophisticated production, it makes sense for companies to combine what used to be service increasingly with the products they offer." Indeed, if they don't do so, manufacturers risk all jobs -- production and service.

The upshot is improved productivity for the U.S. economy and better profits and lower costs for manufacturers.

Now the downside. The act of making a good generally has a greater proportionate impact on the economy than providing a service. Arguably, then, the loss of those jobs could have a greater proportionate impact as well.

Manufactured goods are complex, filled with parts representing a spectrum of industries. Cars made in Detroit need steel made in Indiana, which needs iron ore mined in Minnesota, which needs both ore freighters on the Great Lakes and railroads to deliver it. Put another way, for every dollar spent on a truck or car, an additional $1.82 in goods and services is generated from other industries, according to the Manufacturers Alliance. One dollar spent on financial services generates an additional 72 cents. The effect is that manufacturing provides 16% of the gross domestic product but generates 26% of the total value of the economy.

Sony Corp.'s TV plant in Mount Pleasant, Pa., has developed a network of more than 1,300 vendors within the three area codes surrounding the plant, says spokesman Michael Koff. For its rear-projection-television making operations, 100% of the manufactured parts are sourced within a 300-mile radius, including sand from Pennsylvania and West Virginia to make the glass picture tubes.

Take that production out of the economy and you lose the revenue- and job-producing spillover on downstream suppliers and industries.

A bigger, albeit indirect, risk involves innovation. Making things is the result of invention and the genesis of additional invention. Manufacturing developments led to breakthroughs in software and cancer screening as well as Teflon and drip coffee makers. Such advances often grow out of a collaboration among workers, customers and engineers, who tinker with a production process and create solutions. "The symbiosis between production and innovation is especially important in the medical-device industry," notes Mr. Duesterberg, with equipment makers relying on speedy input from doctors and hospitals and vice versa.

Of course, millions of production jobs will remain in the U.S. because it makes economic sense. Frozen goods and bakery items are perishable and need to be produced close to consumers. Computer-chip maker Intel Corp. will keep production of its most sensitive technology in the U.S. to protect it. Foreign car makers want a production presence here to be close to American consumers.

"Every industry has certain pieces of manufacturing that will shift abroad," says Daniel Meckstroth, chief economist with the Manufacturers Alliance. "But other pieces will remain in the U.S. because they embody high technology within that product or there's a cost advantage to remaining close to customers."

Manufacturers themselves know they walk a delicate line between giving up too much manufacturing and giving up too little. They need to provide more services because increasingly that is where the money is, yet they also have to come up with new products to remain relevant to their customers.

Article points out that only about 52% of people involved in the manufacturing sector are involved in the production of goods. Almost half are in the service sector. A decade ago the percentage in goods production was 68%. There are pluses and minuses to this trend. I guess if you were working on the plant floor or your job moved to China, they are mostly negative.

I guess if you were working on the plant floor or your job moved to China, they are mostly negative.

The negative aspects extend to the "service" area too because as the projects move overseas, profits become slim to non-existent. Thus, the "front" office isn't getting a raise either as they scramble for the few projects left in the supply stream.

I guess if you were working on the plant floor or your job moved to China, they are mostly negative.

Unless you educated yourself and were now working in the cubicle up front.

A temporary fix anyway, until the service-sector job is out-sourced to India.

I'm in Michigan. We outsource to Indiana.

Sorry, it's a "Single Business Tax" joke.

There is no surprise in these statistics. Companies today are much less vertically integrated than in the past. They are constantly off-loading services they used to perform themselves. "Manufacturing" people are doing design, quality and test work they never did before.

There's also the fact that much of what was done manually is now done by CNC machines or robotics. Both generally require more "service" workers and less hands-on folks.

Not to worry.

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