One Plus One Equals Three
By Jessica Lipnack and Jeffrey Stamps
from Small Business Reports, August, 1993
In every industry, in every part of the country, small companies
are cooperating in order to compete. Small firms are joining forces
- sometimes even with their staunchest competitors - to leverage
their resources and skills in new product development, marketing,
distribution and purchasing, among other critical business junctions.
By banding together, small companies can do the work of giants.
In this article, find out why it may be time to grow together rather
than go it alone.
No company can go it alone all the time. With a tight capital market,
rapidly changing technology and a constant onslaught of new regulations,
small companies find going solo can be all too complicated and expensive.
That's why many small businesses are forming flexible business networks,
groups of companies joined together to share costs and leverage
resources. We call these groups "teamnets" because the
companies are willing to cross conventional business boundaries
- and create teams that network for mutual purposes.
Such networks are proliferating across the country, and they go
way beyond traditional outsourcing arrangements. Instead of farming
out only nonessential functions previously done inhouse, today's
teamnets serve a much broader purpose - from the joint purchasing
of major equipment to marketing and distribution, new product development,
sales and training, among other critical business functions. Some
teamnets include competing companies, while others include members
with complementary needs.
Flexible business networks among even the smallest of companies
can yield dramatic results. At the Tri-State Manufacturers Association,
for example, joint purchasing arrangements have enabled 25 of its
120 members - all small metal fabrication firms - to save 25 percent
to 50 percent on supplies. Five metalworking firms have formed the
Massachusetts-based Metalforming Network to collaborate on a $65,000
project to research solvents for parts cleaning. The members pooled
$25,000 of their own funds and leveraged that to obtain a $30,000
grant from the Massachusetts Office of Toxic Use Reduction and $10,000
from the Bay State Center for Applied Technology. Individually,
no single company could afford the R&D costs; the network's
largest member pulls in $4 million in annual sales. But together
they can.
IMPORTING THE CONCEPT
Although companies have been working together for decades, teamnets
got their first large-scale boost during the early 1970s in Italy's
Emilia-Romagna region around Bologna. There, unemployment hovered
near 20 percent, and the region was Italy's 18th poorest. Then,
small manufacturing firms - some comprising only a few workers -
began forming networks. Business boomed. By the end of the decade,
unemployment had fallen to near zero, and the region was Italy's
second wealthiest.
By 1989, Denmark had picked up on Italy's lead, after suffering
from high unemployment and a declining trade balance. The government
allocated $25 million to stimulate the development of "flexible
manufacturing networks" among small firms. Specifically, it
granted $10,000 to groups of three or more companies that explored
network possibilities. Within 18 months, 3,500 companies had formed
networks, which contributed to the fact that Denmark reversed its
balance of trade with Germany for the first time in 32 years.
Meanwhile, here in the United States, economic development experts
began studying the Italian and Danish phenomenon, as small businesses
spontaneously started forming their own teamnets. Oregon, for example,
passed legislation in 1991 making money available to train people
in how to develop networks. Massachusetts passed a similar law in
its 1993 session. And today, nearly every state has some network
activity. Some networks function on virtually no funds, with companies
donating time and services on an as-needed basis. Some pool a small
amount of funds to get the effort off the ground.
Of course, not all networks succeed. Perhaps the biggest impediment
to success is the fear of change. It takes courage to believe that
working with one's competitors really is good for business. And,
of course, every company has its own reasons why such cooperation
is "unnatural" or "can't work here." But the
trick is to learn to work together without giving away one's competitive
edge or trade secrets, and to cooperate without giving up independence.
Indeed, networks work best when each member company has a distinct
competitive role, but all members share a common purpose. Of course,
the network's leadership will shift, depending on the task at hand.
That said, here are profiles of four different types of teamnets.
THE EXTENDED FACTORY
When Harry Brown bought Erie Bolt Co. seven years ago and became
its president, the manufacturer of small metal parts for the defense
and transportation industry was losing at least $100,000 a year,
and was about six months from bankruptcy. So when Brown got an order
that could only be fulfilled with a piece of equipment he didn't
have, he had to turn to Joe Fedorko at Diversified Manufacturing
Co., a competitor. "We didn't have the appropriate equipment
and he did. The arrangement worked," Brown explains.
It worked so well, in fact, that the next time Brown got an order
he couldn't fill, he approached another competitor. Today, Brown's
idea has grown into a thriving network of 16 independent. but allied,
suppliers - including competing specialty plating and coating companies,
heat-treaters and machine shops. The companies operate as a "virtual"
factory, farming out jobs to members that can do them most efficiently.
"When we get a blueprint that involves coordinating the efforts
of more than one shop. we get together to discuss the best way to
go about meeting those requirements," Brown explains. "When
we arrive at the proper manufacturing process, we discuss costs
to make sure we're competitive. Then we submit the bid."
To sharpen their technical edge, the companies also share a common
gauge room, a library of customers' manufacturing specifications
and a video library on technical subjects. They also tour each other's
facilities, a practice virtually unheard of in the highly competitive
world of small manufacturing.
By sharing information and expertise, Brown says, the companies
can reduce rejects and streamline production flow. This efficiency
has enabled them to pass on savings of as much as 30 percent to
customers. As a result, each company has more than doubled its business,
and reduced manufacturing costs by as much as 30 percent. Erie Bolt
Co., now renamed EBC Industries Inc., pulls in $8 million annually.
"This grew our product base, and we all started growing together,"
sums up Brown.
But there are challenges: To make the "virtual" factory
work, the companies must share manufacturing process information,
something most small firms fear. "There's also the potential
that as competitors, one or more of the companies might try to take
on the business themselves," Brown says. "This happened
once. but the company lost the business because it didní'
have the strength of the network."
MARKETING MUSCLE
In 1992, Joseph A. Roberts, CEO of Advanced Circuit Technologies,
a manufacturer of flexible circuits in Nashua, NH, formed a coalition
of 10 electronics firms to jointly package and market noncompeting
products - including computer monitors, keyboards, printed circuits
and electronic design services - under one name: Electronic Packaging
Team (EPT).
Collectively, the members can bid on much larger projects than
any could individually. For example, EPT recently landed a $1.2
million job with Compaq Computer Corp. to design and build a specialized
computer board that required a variety of parts, and three more
major bids with computer and industrial parts manufacturing companies
are in the works. "EPT expects to do $4 million to $10 million
in additional business in 1993," says Roberts.
Although EPT's largest member has annual sales of less than $20
million, the network has beaten out larger competitors because it
can offer customers the convenience and cost savings of one-stop
shopping. That's something that appeals to many of the network members'
customers, who, like many businesses in New England, have been hit
hard by the recession and forced to reduce their purchasing budgets.
Rather than source components from each EPT vendor, major systems
manufacturers now can solicit one joint bid. This streamlined purchasing
process reduces overhead, vendor certification. invoicing and order
tracking.
EPT members also cross-sell each other's products and services.
To do so knowledgeably, top managers meet once a month and tour
each other's facilities. Then, when one company learns about a bid,
it can reach out to the appropriate companies to fill the order.
For example. a sales representative from Prototype Circuits Inc.,
a Manchester, NH-based member that manufactures printed circuit
boards, discovered that a customer was having trouble with its flexible
circuit supplier. Once Prototype gets the proposed drawings and
looks at them, it will send them to Advanced Circuit Technologies.
"Then my company will quote on the flex circuit, and Prototype
will send a joint bid back to the customer," explains Jennifer
Foden, marketing manager at Advanced Circuit Technologies and EPT's
coordinator.
To enhance marketing efforts, each member company contributes $400
to the development of joint four-color sales sheets. On the back,
each company can add its own tag line, including a name and address.
Then, members pool their mailing lists and send literature to each
one's top 20 customers, explaining how the team works. "This
was really economical for all of us," says Foden. "Whenever
you're trying to market something, you have to get the word out
and this was an efficient, low-cost way to do it. There are no dues
and no fees. Companies just have to be able to give time."
THE TRAINING GAP
Several years ago, a group of tool-and-die makers in Arkansas saw
a problem brewing in their industry: Due to an aging workforce,
83 percent of the state's tool-and-die workers will be gone by 2000.
Enter the Metalworking Connection, a network of 95 tool-and-die
makers that has established a program to provide high school students
with academic credit while they work on the shop floor. In 1992,
300 students applied for the Youth Apprenticeship Training Program's
35 slots, and the pressure is on to expand.
In the past, most member companies offered on-the-job training,
but lacked a standardized apprenticeship program. So they formed
a small planning committee, several of whose members had been trained
in sophisticated European apprenticeship programs. To create a credible
program, they decided they needed to gain certification through
the US Department of Labor and to adopt the curriculum of the National
Tooling and Machining Association, which included training in the
key skills of a trained machinist: shop math, shop theory, blueprint
reading, measuring and gauging, and safety.
To raise money to support the program, they jointly applied for
funding from the Arkansas State Department of Education, Vocation
and Technical Education Division. No company could have gotten the
$300,000 grant on its own. But by banding together, the companies
created sufficient critical mass to secure the funding.
Here's how the program works: Students attend regular high school
classes in the mornings, then go on location for on-the-job training
four afternoons a week. On the fifth afternoon, they attend technical
classes. Students who finish the multi-year program can earn up
to 8,000 hours of on-the-job training and 144 hours of technical
training per year. And they have doubled their earning potential-from
$4.50 per hour to $8.80.
To solve the costly problem of workers' compensation - considering
that all students are under 18 years old (the age under which workers'
compensation fees spike) - the Metalworking Connection employs the
teens and covers them under a training classification. The companies
then reimburse the network for the wages paid to the students.
The network also recruits and screens applicants, monitors their
progress and provides the kick-off training for the group. (The
keynote speech at the 1992 kick-off dinner was given by then-Governor
Bill Clinton, who introduced the idea of flexible manufacturing
networks to Arkansas after a trip to Italy.)
In addition, Metalworking Connection members share a "process
capability information system," which profiles the metalworking
processes, machines and worker capabilities available statewide.
This way, companies know where to go if a project is too big or
need to supply a process they cannot perform. The group also has
conducted a survey of hourly wage rates in selected metalworking
occupations, established a group health insurance plan and is considering
a self-insured workers' compensation plan.
PURCHASING POWER
Twenty-five of the 120 members of the Tri-State Manufacturers Association
have joined together to acquire extra purchasing power. The coalition
of metal fabricators currently buys disposable tooling, safety equipment
and even janitorial supplies at a 25 percent to 50 percent discount,
which means $2,500 savings a year for the average member. In the
future, the association hopes to expand its purchasing program to
include more items. Although the program is open to all of Tri-State's
members, only the smallest firms have signed up so far.
"We came up with the idea after a member who was a manufacturer
for the automobile and truck after-market expressed a need to reduce
his supply costs," explains Howard Norberg, CEO of Tri-State,
based in Elbow Lake, MN. "We did an informal survey to see
if others were interested, then approached the board of directors
of C.R.I.B. Inc., which is a buying co-op for seven medium-sized
manufacturers in our area." C.R.1.B. responded enthusiastically,
since more buyers meant that its own costs would go down.
The process for ordering is simple: Tri-State members call or fax
their orders directly to C.R.I.B., which then passes the order on
to a supplier who has agreed to give a discount to C.R.I.B. members.
The supplier ships out the order immediately. Instead of billing
the 25 companies directly, C.R.I.B. bills Tri-State, which handles
the billing of its members, the cost of which is covered in a 5
percent overhead charge. C.R.I.B. also hopes to implement electronic
data interchange (EDI) within the next two years. Using EDI and
bar codes, Tri-State members will be able to place orders from the
shop floor.
Tri-State members must make an up front deposit to prevent defaults;
on average, members deposit $1,000, against which they can draw
up to two-and-a-half times worth of goods. "There is only one
downside," Norberg explains. "Because of low margins,
companies must pay within seven days. If they don't, they can't
use the service. We monitor payment cycles to make sure no one is
falling behind."
The idea has proved so popular that Tri-State members are looking
into buying raw materials together. While this could be a competitive
problem for some groups, it's not an issue for Tri-State's members.
"Although many of our members perform exactly the same processes,
making exactly the same things, they don't have the same customers
and don't compete in the same markets," explains Norberg.
As these examples illustrate, teamnets can solve a variety of business
problems. By sharing costs and expertise, small companies can achieve
competitive economies of scale without forsaking the independence
that typically defines them. By harnessing the power of teamnets,
then, groups of small businesses can become small giants.
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