The Digital Factory With speed and flexibility that leave the Japanese agog, U.S. manufacturers have come roaring back after years in eclipse. The secret? It's the software, stupid.
By Gene Bylinsky REPORTER ASSOCIATE Alicia Hills Moore

(FORTUNE Magazine) – AT ONE END of a cavernous IBM plant in Charlotte, North Carolina, 40 workers toil at an assembly line unlike any you'll find in Japan. The team is building 12 products at once -- hand-held bar-code scanners, portable medical computers, fiber-optic connectors for mainframes, satellite communications devices for truck drivers -- a typical morning's output on a line designed to simultaneously make as many as 27 different products, a virtual catalogue of IBM wares. Around each worker are "kits" of parts that people in a nearby parts cage have assembled to match production orders; more kits arrive as the day progresses. To keep things moving efficiently, each worker has a computer screen hooked into the factory network. It displays an up-to-the-minute checklist of the parts he must install on the product in front of him and will guide him through the assembly steps if he asks it for help. As soon as he finishes his tasks, the worker punches a button and the computer system moves the product via conveyor to the next bench on the line. Welcome to the new American factory -- an information age marvel that is enabling U.S. manufacturing, declared dead more often than a lathe turns, to come storming back. In industries as diverse as construction equipment, cars, PCs, and electronic pagers, Japanese and European producers are scrambling to copy American techniques. The new automation paradigm they're looking to involves an ingenious balancing in which software and computer networks have emerged as more important than production machines, in which robots play a mere supporting role if they're present at all -- and in which human workers are back in unexpected force. Call it the digital factory, for its dependence on information technology, or the soft factory, for its mix of the human and the mechanical. Whatever you call it, it's likely to set the tone of manufacturing for years, even decades, to come. Soft manufacturing brings unheard-of agility to the plant: companies can customize products literally in quantities of one while churning them out at mass-production speeds. Soft manufacturing also blurs the boundaries of the traditional factory by tying production ever closer to both suppliers and customers. It is weaving a fabric of highly automated job shops, or microfactories, across the American landscape and bringing new life to the beleaguered U.S. machine-tool industry. Perhaps most astounding is soft manufacturing's effect on employment: it could stabilize or even increase the number of production-worker jobs in the U.S. Make no mistake about the importance of this trend: In potent combination with the economic recovery and the weakness of the dollar relative to other currencies, soft manufacturing has helped the U.S. leapfrog Germany and Japan to regain the No. 1 spot in manufactured exports for the first time in a decade. Says Blair LaCorte, director of data-management products at Autodesk in Sausalito, California: "The near paralysis of the early 1980s is long gone. We're seeing the beginnings of a revolution in American manufacturing." How quickly things change. Just ten years ago, authorities such as the National Academy of Engineering were sounding alarms about America's manufacturing future. In particular, observers feared Japan for its ability to capitalize on an American innovation known as flexible manufacturing systems (FMSs). Priced as high as $25 million each, such systems typically included computer-controlled machines to sculpt a large variety of complicated metal parts, robots to carry out complex handling chores, and remotely guided carts to deliver materials to the production line. FMSs were widely hailed, especially by the Japanese, as harbingers of "lights out" automatic factories that would be able to operate around the clock almost without workers. Nearly every major U.S. manufacturer fell under the spell. But years of costly efforts to install flexible manufacturing systems taught them a bitter lesson: Too much automation can actually lose you money. For one thing, despite engineers' efforts to build in safeguards, large, complex systems are inherently vulnerable to failure. Robots, in particular, turned out to be a disappointment: they couldn't hack it as assemblers because they would dumbly try to jam a nut into an opening even if it didn't fit. As businesses struggled to escape the FMS trap, soft manufacturing was born. Engineers broke down mammoth FMS installations into more manageable "cells" -- smaller constellations of machines that are just as versatile but less apt to fail. Robots have been relegated to simple jobs at which they excel, like spot-welding; humans, with their unmatched dexterity and judgment, are back in assembly jobs where the robots floundered. And to help the humans, engineers have spread computers and networks liberally around the plants. Explains IBM manufacturing executive L. Ray Mays: "We're not as enamored with automation as we were in the early 1980s. We did a lot of research about what's reasonable to automate and what isn't. We found that it's much more cost efficient to use hand labor with software networks than to use robots, for example. We've learned that in dealing with odd-size components and tight tolerances, humans are more efficient than robots." Result: soft factories that perform beyond the wildest dreams of 1980s automation mavens. Take the plant in Boynton Beach, Florida, where Motorola makes pagers. Orders for the pocket-size gizmos stream in from resellers and Motorola salesmen, typically via an 800 line or E-mail. As the salesman spells out what the customer wants -- "one Sizzling Yellow pager that goes ding-dong, five in Bimini Blue that beep, ten in Vibra Pink that play a little arpeggio," and so on -- the data are digitized and flow to the assembly line. So-called pick-and-place robots select the proper components, but humans assemble the pagers. Often the order is complete within 80 minutes, and depending on where the customer lives, he can have his pagers that same day or the day after. Motorola thinks of the process not as manufacturing but as rapidly translating data from customers into products; its aim is to do so even faster. Says Sherita Ceasar, director of manufacturing: "Our vision is simultaneous manufacturing, to make the pager even as the customer talks. We're getting close." IBM's PC Direct operation in Research Triangle Park, North Carolina, follows a similar pattern. Rows of sales reps answer 800-426-7102 calls from customers -- about 5,000 a day -- and take orders for various models of IBM PCs. IBM is dropping the ValuePoint designation. As they talk, the sales reps enter the particulars of the order on-screen -- the new PC will incorporate, say, a 486 DX66 chip, 16 megabytes of RAM, a built-in fax modem, and so on -- and check to make sure the parts are available. Finished orders are zapped to a nearby assembly plant where computers check them every ten minutes. THOSE SAME computers automatically set production in motion. From a small control room, they send a radio signal to workers called "kitters" on the floor below, like Ron Robinson. He receives the data on his hand-held bar-code reader and then walks from one bar-coded location to another, picking up a hard disk from a bin here, a memory board from a bin there. When he has gathered the complete kit that will become a PC, Robinson takes it to an assembly station. There assembler Tisha Hyman scans the bar code on each part as she builds the machine, and checks her assembly-control screen to make sure the factory system has subtracted each part from inventory. Soon the new PC travels down the line to be automatically tested and packaged -- for delivery to the customer the next day by Airborne Express, if the customer so requests. "We call this software-controlled continuous flow manufacturing," says Barry W. Eveland, vice president for fulfillment. "Where you get an advantage is in your ability to take information from your customer and apply it behind the scenes to control the flow of goods." Marvels Charles Duncheon, vice president of marketing and sales at Adept Technology, a Sausalito, California, robot maker: "We may be seeing the merger of a manufacturing plant with a retail store." No wonder U.S. manufacturers have begun outdistancing foreign competitors in such crucial measures as time to market and manufacturing flexibility. What's equally striking is that the joy of making things for a substantial profit is back. "The executive suites of manufacturers I visit are a lot happier places than they were as recently as three years ago," says Arthur Fury, vice president for sales and marketing at Semtech Corp. of Newbury Park, California, who crisscrosses industrial America selling semiconductors. GE CEO Jack Welch tells subordinates that the 1990s is becoming "the decade of manufacturing." At Hewlett-Packard, CEO Lew Platt calls manufacturing and distribution simply the "core competences" of his company. H-P recently embarrassed its Japanese rival NEC by beating it to market with a line of ink- jet color printers. H-P's units are so good that NEC was forced to withdraw its own printers as uncompetitive only four months after they belatedly hit the market. Other examples of America's manufacturing resurgence abound. Locomotives are among GE's latest successes: the company has been gaining market share abroad because of the superior time-to-market and customizing capability of its plant in Erie, Pennsylvania. Says Richard Segallini, vice president for manufacturing and engineering at the plant: "We have traditional automation at the start of the line to do repetitive, harsh work, such as building locomotive platforms. But where you customize the locomotive -- with different cabs, propulsion, motors, and paint schemes -- you need flexible cells that can be programmed. That's where software becomes more important than hardware. In fact, sometimes you have to take automation out -- it can slow you down." The plant has more than tripled its output since 1992 and has cut the time it needs to build and customize a locomotive from two years to six months. A $1.8 billion overhaul of its factories has enabled Caterpillar to regain preeminence in earthmoving machines. This year it vaulted into the No. 3 position, after Boeing and Intel, among the top 50 U.S. industrial exporters, in percentage of sales derived from abroad. Cat makes two-thirds of its products in the U.S., but nearly half its $12 billion in sales last year came from abroad. The company now has a larger market share in Japan than its Japanese archrival, Komatsu, has in the U.S. The most visible sign of soft automation at Cat's assembly plant in Aurora, Illinois: unmanned vehicles, each the size of an office desk, that scurry from one milling machine to another, delivering and picking up gears. Unlike the carts in Japanese FMS installations, which travel in rigid patterns along wires embedded in the factory floor, the carts at Cat run around like animals. Atop each one is a cup-size range finder that bounces laser beams off large bar-coded panels on the factory walls and tells the cart where it is; computer-directed radio signals from a control center direct its pickups and deliveries. U.S. manufacturing is becoming so good that once again platoons of earnest- looking Japanese can be seen touring U.S. plants. Nothing resembling soft manufacturing is to be found in Japan, where Toyota has been the sole company even to talk about mass-producing customized products. What's more, experts say, copying the Americans will be difficult this time around for most Japanese manufacturers. That's because customizing items for individual buyers runs against the grain: Japan's factories are engineered to mass-produce high- quality identical products and aren't easily reprogrammed. The nation's cumbersome multilayer distribution system works against supplying customized products in the home market. "You get the sense among Japanese business people that they aren't sure what's going on," says Peter Mills, director of intercontinental sales for Adept Technology and a frequent visitor to Japan. What's going on is that the U.S. is seizing back the global lead as software rather than traditional, noncomputerized hardware begins to dominate manufacturing. Patrick J. Toole, an IBM executive vice president, echoes a widespread view when he says, "The computer has become more important than the production tool." Daniel Frayssinet, president of DP Technology Corp. of Camarillo, California, a supplier of leading-edge manufacturing software, estimates that U.S. manufacturers now use three times as much software as the Japanese, and better software at that. PCs are proliferating in American factories just as they did in offices a decade ago: linked in powerful networks, they open the way toward the use of information technology as a great, unifying communications tool -- a kind of superbrain hovering over the factory floor. The pace of innovation is dramatically increasing. For example, computer- aided design (CAD) has evolved far beyond its original embodiment as an electronic drafting board. The best CAD software, from suppliers like Autodesk, Structural Data Research Corp., Parametric Technology, and IBM, now lets engineers plan products, test them onscreen, and even design tools to make them -- all from the same data. CAD has been extended to factory planning, where software from companies like Deneb Robotics, of Auburn Hills, Michigan, lets users design and simulate entire assembly lines. At Chrysler Corp., some 10,000 engineers, designers, and manufacturing experts share a Catia factory database; Catia was developed by Dassault, the French aerospace company, and is sold by IBM. The software includes 48 "modules" -- applications ranging from early modeling of a design concept to the management of data on the production line. A designer can call up on his screen a semitransparent view of a car door he's working on, operate the latch and run the window up and down to check how they work, experiment with lighter materials by adjusting the underlying equations, and use the same data to direct machinery to make prototypes of the parts. Catia helped Chrysler complete its Neon subcompact in a record 33 months -- lopping a year off the company's usual development cycle. Designers at Caterpillar use a system that's even more exotic: a virtual- reality proving ground where they test-drive huge earthmoving machines before they are built. Known as a CAVE (short for cave automatic virtual environment), the system is the brainchild of Thomas A. DeFanti and Daniel J. Sandin of the University of Illinois at Chicago. It is a surround-screen, surround-sound cube about ten feet on each side that creates the illusion of reality for anyone inside by projecting supercomputer-generated 3D graphics onto the walls. Unlike users of video-arcade virtual reality systems, CAVE dwellers do not have to don bulky helmets; instead, they wear lightweight stereo glasses that enhance the vividness of the displays. They can walk around inside the CAVE and operate imaginary controls; the system monitors head and hand motions and adjusts the sights and sounds accordingly. Only three CAVEs exist today, two at University of Illinois campuses and one at the Argonne National Laboratory near Chicago. Corporate partners at the National Center for Super-computing Applications (NCSA) -- Caterpillar is one -- can use the CAVE in Champaign-Urbana to test their products. In Caterpillar's simulation you sit in a mockup of an earthmover and put the huge machine into motion just as you would in real life at the company's Peoria, Illinois, proving ground, which the CAVE mimics. The engine roars convincingly and backup signals sound as you scoop up virtual gravel and dump it on a pile. The experience has its uncanny aspects: you can drive with impunity through walls of buildings and stick your hand through the windshield without ill effects. The woman who runs the demonstration waves her control wand in a final flourish; the images on the CAVE walls change as you are transported through the side of the cab to the ground, where you can look up at the big Cat and walk around it. Then she flies you, feeling weightless, back into the driver's seat. Caterpillar's CAVE program isn't just for thrills. Two machines the company will introduce next year, a backhoe and a wheel loader, will incorporate visibility and performance improvements based on data from virtual test drives. Explains Kem D. Ahlers, the Caterpillar engineer who heads the project: "We took CAD data that describe the vehicles, put them in the virtual environment, and instead of using iron, we manufacture our machines in electrons and light." Sophisticated computer programming has sparked a revival among U.S. machine- tool makers, who supply the gear for manufacturing lines. They lost their No. 1 position in the $4-billion-a-year industry in 1982 and now are a distant third behind the Japanese and the Germans. But American companies dominate the new, fast-growing market for so-called rapid prototyping machines, computer- driven units that fabricate parts directly from design data, much as a laser printer spits out a spreadsheet. One such machine, developed by 3D Systems, a startup in Valencia, California, builds prototypes by precisely depositing layer upon layer of powdered metal, a process known as stereolithography. Using a 3D machine, Mercedes-Benz recently checked the fit of 50 parts for a new engine, cutting development time by 80% and saving a lot of money. Another rapid prototyping system from 3D shapes parts by aiming a laser beam at a vat of photoreactive resin that congeals wherever the beam lingers. By far the most spectacular computer-controlled tools are hexapods, which are just now hitting the market. These lightweight machines represent the biggest advance in machine tools since Englishman Henry Maudslay perfected the industrial lathe in 1800. Hexapods, which resemble ordinary machine tools about as much as a spaceship resembles a train, are capable of handling unprecedentedly complex machining tasks. Embodying the same mechanical principles as a flight training simulator, a hexapod has six legs with computer-controlled motors, which enable the machine's spindle platform to bring tools to bear from any angle in three-dimensional space. Unlike conventional machinery, in which the spindle follows the path of a mechanical guideway, the spindle in a hexapod maneuvers through the air as prescribed by software. On the factory floor, hexapods look like giant hula dancers in motion as they carve out intricate metal parts. The new machines will bring unheard of agility and mobility to manufacturing. A hexapod can weigh one-tenth as much as a conventional machine tool of comparable power, and unlike the standard tool, incorporates its own frame and needs no special foundation or external support. It can be moved easily and rapidly on the back of a truck and will work anywhere parts need to be made -- even on a lawn. Just as highly mobile, truck-launched Soviet Katyusha rocket artillery helped win World War II, hexapods promise to serve as powerful competitive weapons in the manufacturing wars. Giddings & Lewis introduced its Variax machining center this September; the hexapod weighs 15,000 pounds, one-third the weight of a comparable conventional tool; its price has not yet been set. Early next year, Ingersoll will introduce a much bigger hexapod, while Geodetics Inc. will offer a compact version to sit on a desk. How can manufacturers take advantage of such technological wonders? Not surprisingly, the businesses best suited for soft manufacturing techniques are those that have already broken themselves into smaller units, flattened the bureaucracy, and organized workers on the factory floor into teams with real decision-making power. In planning factories, soft manufacturing pioneers have taken the step-by-step functions of traditional manufacturing -- conception, design, tooling, manufacturing, distribution, and field maintenance -- and telescoped them radically. When Motorola set up its customized pager plant, for example, it insisted that product designers, process developers, computer specialists, and automation engineers all work side by side in the same lab. The objective, explains Glenn Urbish, one of the factory's founders, was to scrutinize the production cycle in unprecedented ways. To learn how to make pagers stronger, for example, he and his colleagues dismantled dolls and toy trucks -- "some of the toughest products made," says Urbish. They quizzed suppliers to pinpoint causes of delay, the most common of which turned out to be the repeated handling of data. When you order parts and your supplier enters your order into his system, explains Urbish, "you lose time. We want a production machine that takes data and starts churning out a tool or a product. Seamlessness is the secret of timeliness." Motorola engineers helped suppliers upgrade their information systems to accept orders electronically; of one supplier Urbish says, "His machines became an extension of our plant." Like the pager plant, most soft factories depend heavily on outside suppliers -- a fact reflected in the rise of a new generation of job shops, nicknamed microfactories, across the U.S. Unlike traditional job shops, which usually specialize in stamping out parts or making prototypes, microfactories are high-tech establishments that supply ready-made assemblies, such as automated wafer handlers for chipmakers.

A THRIVING example: Westt Inc. in Menlo Park, California, which builds materials handling systems for Conner Peripherals, defense contractor Watkins Johnson, and other Silicon Valley companies. In 1991, Brian J. Westcott, 37, a Stanford Ph.D. engineer who had worked in manufacturing at GE, started the company with three friends: Gregory S. Lewis, 41, another Stanford Ph.D.; Thomas M. Stepien, 33, a software expert; and Mark Muenchow, 40, a former Morgan Stanley investment banker. The four wanted to test their belief that fortunes can still be made by manufacturing in the U.S. In spacious, airy quarters on an industrial side street, Westt currently operates two $120,000 Cincinnati Milacron milling machines and a $120,000 turning center from the same company; the plan is to expand into a set of regional microfactories. All will be linked by electronic networks so Westt can make the most efficient use of its employees' knowledge and its expensive machines. There are obstacles to the new factory revolution, to be sure. There are obstacles to the new factory revolution, to be sure. Machine-tool makers still complain bitterly that not enough capital is going into factories and factory equipment. Says Ingersoll chairman Edson Ingersoll Gaylord: "As a country, we're still spending 17 times as much capital on shopping centers and insurance companies as on capital equipment." Dennis E. Wisnosky, CEO of Wizdom Systems of Naperville, Illinois, a maker of PC-based shop-floor controllers, laments that it's still difficult for a new manufacturing company to go public. The spread of new technology and know-how across the country is uneven at best. Just as farmers still plant corn in rows 40 inches apart -- the right width to accommodate a plow horse -- old ways in manufacturing are slow to die. Lutz F. Hahne, general manager of IBM's manufacturing-industry sales, reports that he recently ran across a medium-size company that still keeps its records on handwritten three-by-five cards. Factories that try to shift to soft automation, meanwhile, find that making various brands of computer hardware and software work together can be an unexpected challenge; interchangeable "open systems" are just beginning to emerge. And snafus afflict even factories that succeed at installing the latest, whizziest computers to link up with their suppliers. Jim Fortunes, who manages PC production for IBM in North Carolina, tells of a supplier that, without notifying IBM, changed the alloy it used to line certain electrical contacts. IBM would have turned out thousands of faulty computers had an alert assembler at the PC plant not noticed that the contacts no longer worked. The greatest roadblock to a U.S. manufacturing renaissance is a shortage of qualified workers. It encompasses not just Ph.D. manufacturing engineers but also skilled laborers to work in busy job shops, like Industrial Modern Pattern & Mold Corp. in Rosemont, Illinois. The 13-employee, $1.5-million-a- year business, tucked away on a commercial side street, turns out prototypes for Motorola, GM, and other companies. Owner Louis Daniel has just ordered a $250,000 fast-prototyping machine, but today Industrial Modern looks exactly as you'd imagine a conventional job shop: it occupies rather crowded quarters, uses standard machine tools, and has just one PC in the back for design work and a few more in the modest front office. Daniel likes to hire young people and train them as machinists, eventually paying them as much as $20 a hour plus benefits. But he's at a loss to find qualified applicants: "I've been advertising in the papers without results for months. If I could find qualified workers, I could enlarge my operation to 100 people tomorrow." To help fill similar job gaps in their own areas, companies like Ingersoll Milling Machine Co., in Rockford, Illinois, have been pumping money into nearby junior colleges and bringing in local high-schoolers for tours of the plant. Despite such headaches, the advent of soft manufacturing represents a potent tonic for America's economy. Some experts see an end at last to the steep decline in the number of production workers employed, which in the past 15 years has plunged from more than 15 million to 12 million. Already, in the past 12 months, the Labor Department has recorded a gain -- some 214,000 -- in the number of workers employed. Even a slight rise has an outsize economic effect: studies show that each new high-paying manufacturing job creates 4.5 additional jobs in the community. Craig Giffi, associate national director of manufacturing consulting for Deloitte & Touche in Cleveland, expresses a belief held by some experts when he predicts that factory employment will either remain constant or increase by up to two million jobs in the next five years. Ken Goldstein, who studies factory employment at the Conference Board in New York, says that the most substantial growth will be in high-end jobs, those that require skills far beyond those of the traditional factory operative. That's because in the shift to soft manufacturing, companies will need high- tech factories no matter what product they make. Caterpillar's 21,000- employee manufacturing force, for example, includes no fewer than 250 "finite element analysts" -- specialists who subject parts and machines to simulated stresses inside computers. Says vice president for technical services Gerald Palmer: "We want to create in a digital world." Teams of knowledge workers are the people who make the soft factory go. Ask Wisnosky of Wizdom Systems to identify the seminal thinkers in manufacturing today, and he replies: "There's no Taylor, no Sloan, no Colt. There are teams of people -- the work is coming out of information sciences." Himself an innovator in soft factory design, Wisnosky isn't losing sleep over the shortage of skilled labor, which he figures will eventually solve itself. Today's 12-year-olds who are growing up with PCs, he reasons, will surely find the new factories interesting places to work.

SOUND FAR-FETCHED? Sean McAlinden, a research scientist at the Office for the Study of Automotive Transportation at the University of Michigan, believes the auto industry, for one, is on the verge of a wholesale renewal of its work force. He looks forward to the year 2000, when about half of today's auto workers will have retired and "we can create an automotive labor force consisting entirely of skilled workers -- problem solvers." If those problem solvers succeed in helping U.S. automakers expand their global share, adds McAlinden, jobs lost to streamlining will be replaced by jobs linked to growth.

Perhaps the biggest hazard U.S. manufacturers face is complacency with their newfound success. GE's Jack Welch, in a speech before the Detroit Economic Club earlier this year, warned American manufacturers, "That way lies danger, because while we pat ourselves on the back, global competitors are working with feverish intensity to overcome the disadvantages of their economies and their currencies." Japanese CEOs he knows, Welch said, are beginning to execute draconian cost cuts, eliminating 30% to 50% of their production expense. But the best American manufacturers aren't standing still; they are constantly improving their agile systems by utilizing what IBM's Toole calls "America's secret weapon -- the microprocessor" and the software that goes with it.