The Obama administration signaled in its fiscal year 2010 budget outline released in February 2009 that it would invest in new strategies to boost the commercialization of basic research and development, allocating $50 million in new funds to the Department of Commerce’s Economic Development Program to boost the development of new regional innovation clusters. Tellingly, however, administration officials also decided to significantly increase funding for a 20-year-old program—the Manufacturing Extension Partnership program—which helps our nation’s small- and medium-sized businesses remain globally competitive by encouraging applied innovation through a variety of projects.

The Manufacturing Extension Partnership program is not very well known even among technology and innovation experts in the administration and on Capitol Hill. But MEP should be a more widely recognizable acronym, not only for what it does, but also for what those involved with it have learned over the past 20 years. Intriguingly, the program is a lesson in government discovering what small- and medium-sized businesses need and then delivering those services—actions most people rarely consider a government program capable of.

But first, what is MEP? The Manufacturing Extension Partnership is a program within the National Institute of Standards and Technology, or NIST, which is housed in the Department of Commerce. MEP was created by the Omnibus Foreign Trade and Competitiveness Act of 1988 “to enhance productivity and technological performance in United States manufacturing.” [1]

Over the past 20 years, MEP developed from a small pilot program with three centers into a sprawling system of 59 centers in 393 locations in every state and in Puerto Rico, employing over 1,600 specialists in business and manufacturing. MEP provides small- to medium-sized manufacturing companies with a wide array of fundamental services, helping them to become more efficient, resilient, and strong in an increasingly competitive global market. With $125 million allocated to the MEP in the proposed fiscal 2010 budget, up about $15 million from fiscal 2009 levels, the program is on a strong financial footing and is poised to expand and improve its services.

After eight years of flat growth during the Bush Administration, MEP is poised once again to play a small but vital role in helping America’s small manufacturers compete with international rivals in the increasingly global marketplace. The MEP’s work on process efficiency improvements as well as growth, technology, and innovation strategies is a smart allocation of finite government resources tailored to draw in matching funds from the private sector. As confirmed by dozens of case studies (some described below), the MEP program is often the difference between life and death for small- and medium-sized companies beset with difficult challenges, struggling to survive.

Our economic future depends on the success of these businesses as we move further into the 21st century, which is why support for MEP and other initiatives that encourage innovation and technology acceleration is a smart choice. Above all, though, an examination of the program’s effectiveness over the past 20 years as it adjusted to new challenges while its leaders learned what worked and what didn’t provides good policy lessons for other Obama administration efforts to boost applied innovation in the coming years.

This essay will examine the history of the MEP program, particularly how it has adjusted to new realities, to understand why it is now poised to play a new role helping small- and medium-sized businesses grow and prosper by tapping new technologies at federal labs—the program’s initial, yet premature, mission 20 years ago but one well-suited to today’s challenges.

The Importance of Manufacturing

Before we examine the MEP program in depth, however, we need to set the macroeconomic stage. The U.S. manufacturing industry plays a key role in the American economy, accounting for 12 percent of gross domestic product as well as 10 percent of U.S. nonfarm employment. [2] Companies large and small provide jobs for millions of Americans and spur technological innovation and regional development by competing hard in national and international markets.

The vast majority of these manufacturing companies are small- and medium-sized businesses that face the highest hurdles to remain competitive in a global economy. Companies with 500 employees or less account for 95 percent of all manufacturing establishments, half of all manufacturing employment, over half of total U.S. manufacturing value-added, and a wide distribution of high-wage jobs across the United States. [3] According to the Department of Commerce, 350,000 of these types of companies operate in the United States, and a 2003 study conducted for the National Association of Manufacturers highlights the continued importance of small manufacturers to U.S. economic performance. [4] The NAM study found that:

• Manufacturing growth spurs more additional economic activity and jobs than any other economic sector. Every $1 of final demand for manufactured goods generates an additional $0.67 in other manufactured products and $0.76 in products and services from non-manufacturing sectors.

• Manufacturing salaries and benefits average $54,000, compared to $45,600 for the private sector overall. The higher pay and benefits and opportunities for advanced education and training that are available in manufacturing are particularly attractive to potential employees.

• Manufacturers are responsible for almost two-thirds of all private sector research and development--$127 billion in 2002.

• Manufacturing productivity gains are historically higher than those of any other economic sector. Over the past two decades, manufacturing averaged twice the annual productivity gains of the rest of the private sector.

Unfortunately, small- and medium-sized manufacturing companies are too often the least able to quickly introduce new products and technology, reduce costs, and increase quality. Indeed, as globalization began to hammer U.S. manufacturers in earnest in the early 1990s, many small- and medium-sized manufacturers were the least able to meet the challenge. According to a study conducted by the National Research Council of the National Academy of Sciences in 1993, small manufacturers were often unfamiliar with changing technology, new production techniques, and the latest business management practices. Yet, they were too isolated to learn from market competition to change their ways or seek out good advice, and too small to find the financing they needed to upgrade their operations even if they decided upon an innovative upgrade or shift in their operations. [5]

The Birth of the MEP

Enter the Manufacturing Extension Partnership. The Omnibus Trade and Competitiveness Act of 1988 directed the Secretary of Commerce via the Director of the National Institute of Standards and Technology to establish a manufacturing technology centers program, the precursor to MEP. The centers were to provide small manufacturers with technology developed in NIST labs as a way to improve manufacturing productivity. Labs were to license the NIST-developed technology to state-based centers, which would in turn charge fees to manufacturers who unilized the services provided by the centers.

Congress urged participation from universities, industry, state governments, and other federal agencies. Proposals to establish centers were solicited from qualified non-profit organizations and based on regional need, technology resources, technology delivery mechanisms, and management and financial plans. Applicants were required to contribute 50 percent or more of these centers’ proposed capital and maintenance costs for the first three years and an increasing share up to 80 percent in the sixth year.

Alas, it soon became clear there was a significant gap between the technology developed in the federal labs and the capabilities of many small manufacturers to utilize the technology, even with the help of the manufacturing technology centers. In fact, most small manufacturing companies had more foundational needs—for things like management information technology, financial management systems, and fundamental business processes to improve cost efficiency and profitability. In response, tactical and strategic changes were made during the 1990s, reorienting the services provided by the centers from technology transfer to more basic productivity improvement assistance, services not dissimilar from basic consulting.

This shift met with success as the number of centers grew from 7 in 1992 to 75 (with 400 satellite offices) in 1996, providing services to all 50 states and Puerto Rico. Helping drive the shift was funding from the Defense Advanced Research Projects Agency’s Technology Reinvestment Project, a $1 billion commercial investment program started in the 1992 fiscal year. One of the largest funding programs in the history of the Department of Defense, the TRP sponsored 133 projects that had military as well as commercial uses, referred to as “dual-use projects.” Small businesses were strongly represented in the projects receiving DARPA funding, with 58 percent of the approved proposals having a small business involved in the project. [6] DARPA support was integral in the expansion of the manufacturing technology centers as funding for new projects spurred small businesses to seek assistance from the centers.

Additionally, the enactment of the Technology Administration Act of 1998, which eliminated the sunset provision in the initial 1988 legislation, allowed for ongoing federal funding of the centers. This reform was accompanied by the program name change to the Manufacturing Extension Partnership, and a new funding formula that mandated one third of funding would be provided by the MEP program, one third would come from state, city/town, or nonprofit sources, and one third would be collected as fees from the small manufacturers helped by the program.

This public/private/nonprofit structure is vital to the success of the MEP program, a unique partnership in which each stakeholder contributes its singular resources. The partnerships are built differently from place to place. In some areas, states provide most of the local funding, while nonprofits and city/town governments do not significantly contribute. In other areas, nonprofit organizations such as economic development agencies or entrepreneurship advocacy groups, as well as universities, contribute most of the local funding.

Overall, federal funding (from the MEP) and private funding from the manufacturers) is important to the overall success of the partnership. However, state, city/town, and nonprofit funding is integral as this funding secures local players as stakeholders in the program, and synergizes with the local economic development plans that are essential for comprehensive regional development.

The MEP Program Today

As mentioned above, the MEP program today consists of 59 manufacturing extension centers and 393 satellite locations throughout the United States and Puerto Rico. Each center works directly with local companies to provide expertise and services tailored to their most critical needs, including employee training, new business practices, the application of information technology, and basic process improvements. Services are delivered through direct assistance from center staff, outside consultants or some combination of both.

The MEP centers themselves are a diverse network of state-university-based, and freestanding nonprofit organizations. Each center’s size is based largely on an individual center’s ability to match federal funding at the time of the initial award. In fiscal year 2008, ending September 30, 2008, the last year in which complete data are available, MEP served 31,961 manufacturers.

The early shift in philosophy from technology transfer to consulting services, as well as the rapid expansion across the country, proved to be a winning strategy. An independent study of the efficacy of MEP centers in 2007 found that MEP services led to: Improved productivity among 8 in 10 MEP clients; 57,000 jobs created or retained; $10.5 billion in new or retained sales; $2.2 billion in new private investment, and cost savings of over $1.4 billion. The study also found that:

• 91 percent of clients were either satisfied with the quality of services received

• 89 percent of clients were more competitive as a result of services

• 86 percent of clients took actions more quickly with assistance of its local center

• 80 percent of clients improved employee skills

• 79 percent of clients took actions at a lower cost

• 76 percent of clients improved the work environment for employees

The MEP centers achieved this record of success for many different reasons, the study concluded. Predominantly, though, success came through a number of services that helped companies reduce costs to improve competitiveness.

A New Direction

Yet once these companies streamline their production processes, make their workforce and workplace more efficient, and reduce overall costs through business operations improvements, many still do not have the top line growth strategies in place to take their development to the next level. This realization has led to new MEP efforts to guide companies not only toward greater efficiency but also toward developing new products, entering new markets, and integrating innovative technologies. These new growth services are designed to give companies the tools they need to not just survive but thrive in the global marketplace.

The core of these new growth programs is the development and implementation of a nationwide technology acceleration system. The acceleration program strives to catalyze manufacturing innovation in products, processes, services, and new business models, buiding on the increased efficiencies and lower costs cultivated by MEP’s bottom-line services.

These new growth programs, not dissimilar in philosophy from that of the MEP-precursor manufacturing technology centers, connect small manufacturers with sophisticated federal, state, or university R&D labs, with an eye toward boosting manufacturer capabilities and growth opportunities, as well as where manufacturer needs are connected with technology solutions developed at research laboratories.

Two examples highlight the success of these endeavors in helping companies first make important process improvements and then, eventually, helping them embrace technological innovation, grow into new markets, and develop new products.

Process Equipment & Service Company

The New Mexico MEP recently worked on bottom-line improvement strategies with PESCO, a manufacturer of oil and natural gas production equipment, to streamline its product development and general operations. Over the course of a year, PESCO production increased by 25 percent. Since 2002 the company has doubled production while reducing work hours and maintaining the same level of staff.

In addition, the New Mexico MEP helped PESCO reorganize its “cash-to-cash” process (the time from when an order is placed and materials procured to when it is invoiced and paid) and its accounts receivable (the amount of money owed by customers but as yet unpaid), two areas in which companies can easily lose significant sums of money. With the help of the local MEP, PESCO reduced its accounts receivable process to 35 days from 58 days and its “cash-to-cash” cycle to 95 days from 133 days.

Based on recommendations from the MEP, PESCO also developed a trailer system that more efficiently moved a product through the manufacturing process. These efficiency improvements modernized PESCO’s product line, turning it from a 200-hour process into a 150-hour process. With all of these improvements, profit margins increased, boosting wages and allowing for greater employee retention. [8]

Questech Corporation

The Vermont MEP worked with Questech Corporation, a leading manufacturer of natural stone and metal tile, to discover, build, and develop new technology that would increase revenue and better meet customer demand. In response to internal surveys that showed maintenance as one of the primary problems customers had with Questech’s tile products, the company sougot to develop a revolutionary product that addressed these concerns. Vermont MEP “coaches” met with the Questech team during the discovery process to provide general assistance, help with the cultivation of ideas, and keep the team on track.

Within six weeks of the initial MEP consulting session, Questech launched a test of their new tile maintenance product in a large showroom in Albany, New York. The new innovation carries an anticipated yearly revenue increase of $30,000, with the anticipated establishment of Q-Seal (the new product) in New England by spring 2008. [9]

MEP Partner Programs within Government

MEP also works closely with other government programs and agencies to leverage different expertise, strengths, and resources. MEP has partnership programs with the Department of Labor’s Workforce Innovation in Regional Economic Development, or WIRED program, the Small Business Innovation Research grant program run by various government departments, the Environmental Protection Agency’s Green Supplier Network, National Institutes of Health, the Environmental Protection Agency, the Food and Drug Administration, and the National Science Foundation. These partnerships are integral to the work of the MEP, and to the greater project of building American economic competitiveness.

WIRED has a uniquely effective partnership with the MEP. The WIRED Initiative is a program intended to develop talented high-skill workers as a means of catalyzing U.S. economic growth. The initiative focuses on distressed regions of the country, areas recovering from natural disasters, highly dependent on a single industry, or significantly influenced by outsourcing. The program supports innovative approaches to education and workforce development, preparing workers to better compete both within the United States and globally.

MEP has run pilot programs for WIRED in eight distressed regions, developing best practices for technology transfer and innovation activities that WIRED has implemented across its network. This work has been closely aligned with the new MEP growth strategies focused on implementing innovation and technology in small manufacturers.

Additionally, the MEP works directly with the Small Business Administration’s Small Business Innovation Research and Small Business Technology Transfer programs, helping small manufacturers apply for funding from the SBA as well as assisting SBIR/STTR awardees maximize the money’s impact on operations and efficiency. With more than $2 billion available via the SBIR route yearly, small manufacturing companies are often transformed by the grants, making partnership with the MEP very attractive.

MEP and NIH also have developed a one-year SBIR pilot project in which NIH will provide $375,000 for MEP to work with a number of so-called NIH Phase II awardees, for-profit companies with potentially commercializable ideas that have passed Phase I feasibility studies to establish the scientific/technical merit of proposed research and development efforts. Phase II awardees cannot receive more than $750,000 total for a period not to exceed 2 years. Results of the MEP/NIH SBIR pilot are expected to be used in guiding a larger two-year funded partnership between MEP and NIH to improve the commercialization efforts of their Phase II awardees—a critical issue for NIH and other federal SBIR agencies.

Future Plans

The MEP stands at a crossroads. With a wealth of historical wisdom on what works and what doesn’t with respect to small-and medium-sized business development, the MEP is poised to play an essential role in spurring a nationwide economic recovery and building the public-private partnerships that are vital to the stimulation of our nation’s latent innovation capabilities.

MEP’s strategy to tap private, university, and federal labs for new technology of use to small- and medium-sized manufacturers, especially via the government programs outlined above, is certainly timely today. This technology transfer activity was MEP’s original mandate, and while untenable twenty years ago, it is now widely considered a good template for how to boost American innovation and global competitiveness.

The key to the MEP’s success, however, is and will be its partnerships. Small- and medium-sized manufacturers are a lot more receptive today to these public-private partnership growth strategies than they used to be. Utilizing MEP as a conduit for the transfer of technology on efficiency and cost is now less foreign to these manufacturers. Process improvement assistance, while still important, is not going to be as common a MEP strategy as working with their clients on developing new markets, new products, and innovative solutions to complex technology problems. This should help strengthen the small- and medium-sized manufacturers that are the backbone of our entrepreneurial economy and our source of global strength.

Justin Masterman is a Science Progress Intern who recently graduated from the University of Pennsylvania.

Endnotes

[1] Omnibus Foreign Trade and Competitiveness Act of 1988, 15 U.S.C. §278k (1988)

[2] U.S. Department of Commerce, Bureau of Economic Analysis. 2007.

[3] Defense Manufacturing in 2010 and Beyond: Meeting the Changing Needs of National Defense, Board on Manufacturing and Engineering Design, Commission on Engineering and Technical Systems (National Research Council, 1999).

[4] “Securing America’s Future: The Case for a Strong Manufacturing Base,” Prepared for the NAM Council of Manufacturing Associations by Joel Popkin and Company (June 2003)

[5] NRC Study, 1999

[6] “A Review of the Technology Reinvestment Project,” Potomac Institute for Policy Studies (January 1999).

[7] “Delivering Measurable Returns,” Fiscal Year 2007 Results of the MEP program, cited on MEP website: http://www.mep.nist.gov.

[8] Information from MEP website: http://www.mep.nist.gov