Hear from guest columnist Onega Ulanova on AI and quality management systems in manufacturing. Photo via Getty Images

The concept of quality management is so intrinsic to modern manufacturing — and yet so little understood by the general public — and has literally revolutionized our world over the past hundred years.

Yet, in the present day, quality management and the related systems that guide its implementation are far from static. They are continuously-evolving, shifting to ever-changing global conditions and new means of application unleashed by technological innovation.

Now, more than ever, they are essential for addressing and eliminating not only traditional sources of waste in business, such as lost time and money, but also the physical and pollutant waste that threatens the world we all inhabit.

But what are quality management systems, or QMS, exactly? Who created them, and how have they evolved over time? Perhaps most pressingly, where can they be of greatest help in the present world, and when can they be implemented by businesses in need of change and improvement?

In this article, we will explore the history of QMS, explain their essential role in today’s manufacturing practices, and examine how these systems will take us into the future of productivity.

Quality Management Systems: A Definition

In the United States and globally, the gold standard of quality management standards and practices is the American Society for Quality. This preeminent organization, with over 4,000 members in 130 countries, was established in 1946 and has guided practices and implementation of quality management systems worldwide.

The Society defines a quality management system as “a formalized system that documents processes, procedures, and responsibilities for achieving quality policies and objectives,” and further states that “a QMS helps coordinate and direct an organization’s activities to meet customer and regulatory requirements and improve its effectiveness and efficiency on a continuous basis.”

From this definition, it can be understood that a good quality management system’s purpose is to establish the conditions for consistent and ever-increasing improvement through the use of standardized business culture practices.

Which QMS Standards are Most Widely Used?

The results of quality management’s remarkable growth since the 1940s has led to the rise of a number of widely-used standards, which can serve as the basis for companies and organizations to design and implement their own practices. Most of these modern quality management standards are globally recognized, and are specifically tailored to ensure that a company’s newly-developed practices include essential elements that can increase the likelihood of success.

The most widely-known entity which has designed such guidance is the International Organization for Standardization (ISO), a global organization which develops and publishes technical standards. Since the 1980s, the ISO has provided the 9000 series of standards (the most famous of which is 9001:2015) which outline how organizations can satisfy the checklists of quality management requirements and create their own best practices.

In 2020, over 1.2 million organizations worldwide were officially certified by the ISO for their quality management implementation practices.

However, it should be understood that the ISO 9000 standards are merely guidelines for the design and implementation of a quality management system; they are not systems in and of themselves.

Furthermore, the ISO is far from the only relevant player in this field. Many industry-specific standards, such as the American Petroleum Institute’s API Q1 standard, have been developed to target the highly specialized needs of particular business practices of oil and gas industry. These industry-specific standards are generally aligned with the ISO 9000 standards, and serve as complimentary additional guidance, rather than a replacement. It is entirely possible, and in many cases desirable, for a company to receive both ISO certification and certification from an industry-specific standards body, as doing so can help ensure the company’s newly-developed QMS procedures are consistent with both broad and specialized best practices.

A History of Quality Management

The concept of quality management is intrinsically tied to the development of industrial production. Previous to the industrial revolution, the concept of ‘quality’ was inherently linked to the skill and effort of craftspeople, or in other words, individual laborers trained in specialized fields who, either individually or in small groups, produced goods for use in society.

Whether they were weaving baskets or building castles, these craftspeople were primarily defined by a skill that centered them in a specific production methodology, and it was the mastery of this skill which determined the quality. Guilds of craftspeople would sign their works, placing a personal or group seal on the resulting product and thereby accepting accountability for its quality.

Such signatures and marks are found dating back at least 4,500 years to the construction of Egypt’s Great Pyramid of Giza, and came into widespread practice in medieval Europe with the rise of craft guilds.

In these early confederations of workers, a person’s mastery of a skill or craft could become a defining part of their identity and life, to the extent that many craftspeople of 13th Century Europe lived together in communal settings, while the Egyptian pyramid workers may have belonged to life-long ‘fraternities’ who returned, year after year, to fulfill their roles in ‘work gangs’.

However, in the Industrial Revolution, craft and guild organizations were supplanted by factories. Though ancient and medieval projects at times reached monumental scale, the rise of thousands of factories, each requiring human and machine contributions to generate masses of identical products, required a completely different scale of quality management.

The emphasis on mass production necessitated the use of workers who were no longer crafts masters, and thus resulted in a decrease in the quality of products. This in turn necessitated the rise of the product inspection system, which was steadily refined from the start of the Industrial Revolution in 1760 into the early 20th century.

However, inspection was merely a system of quality control, rather than quality management; in other words, simply discarding defective products did not in and of itself increase total product quality or reduce waste.

As influential American engineer Joseph M. Juran explained, in 1920s-era America, it was common to throw away substantial portions of produced inventory due to defects, and when Juran prompted inspectors at his employer’s company to do something, they refused, saying it was the responsibility of the production line to improve. Quality control, in and of itself, would not yield quality management.

As is often the case in human history, war was the driver of change. In World War II, the mobilization of millions of American workers into wartime roles coincided with the need to produce greater quantities of high-quality products than ever before.

To counteract the loss of skilled factory labor, the United States government implemented the Training Within Industry program, which utilized 10-hour courses to educate newly-recruited workers in how to conduct their work, evaluate their efficiency, and suggest improvements. Similar training programs for the trainers themselves were also developed. By the end of the war, more than 1.6 million workers had been certified under the Training Within Industry program.

Training Within Industry represented one of the first successful implementations of quality management systems, and its impact was widely felt after the end of the war. In the ashes of conflict, the United States and the other Allied Powers were tasked with helping to rebuild the economies of the other wartime combatants. Nowhere was this a more pressing matter than Japan, which had seen widespread economic devastation and had lost 40 percent of all its factories. Further complicating the situation was the reality that, then as now, Japan lacked sufficient natural resources to serve its economic scale.

And yet, within just 10 years of the war’s end, Japan’s economy war growing twice as fast per year than it had been before the fighting started. The driver of this miraculous turnaround was American-derived quality management practices, reinterpreted and implemented with Japanese ingenuity.

In modern business management, few concepts are as renowned, and oft-cited for success, as kaizen. This Japanese word, which simply means “improvement,” is the essential lesson and driver of Japan’s postwar economic success.

Numerous books written outside Japan have attempted to explain kaizen’s quality management principles, often by citing them as being ‘distinctly Japanese.’ Yet, the basis for kaizen is actually universal and applicable in any culture or context; it is, simply put, an emphasis on remaining quality-focused and open to evolution. The development of kaizen began in the post-war period when American statistician William Edwards Deming was brought to Japan as part of the US government’s rebuilding efforts.

A student of earlier quality management thought leaders, Deming instructed hundreds of Japanese engineers, executives, and scholars, urging them to place statistical analysis and human relationships at the center of their management practices. Deming used statistics to track the number and origin of product defects, as well to analyze the effectiveness of remedies. He also reinstated a key idea of the craftsperson creed: that the individual worker is not just a set of hands performing a task, but a person who can, with time, improve both the self and the whole of the company.

Deming was not alone in these efforts; the aforementioned Joseph M. Juran, who came to Japan as part of the rebuilding program several years later, also gave numerous lectures expounding similar principles.

Like Deming, Juran had previously tried to impart these approaches to American industry, but the lessons often fell on deaf ears. Japanese managers, however, took the lessons to heart and soon began crafting their own quality management systems.

Kaoru Ishikawa, who began by translating the works of Deming and Juran into Japanese, was one of the crucial players who helped to create the ideas now known as kaizen. He introduced a bottom-up approach where workers from every part of the product life cycle could initiate change, and popularized Deming’s concept of quality circles, where small groups of workers would meet regularly to analyze results and discuss improvements.

By 1975, Japanese product quality, which had once been regarded as poor, had transformed into world-class thanks to the teachings of Deming, Juran, and kaizen.

By the 1980s, American industry had lost market share and quality prestige to Japan. It was now time for US businesses to learn from Deming and Juran, both of whom at last found a receptive audience in their home country. Deming in particular achieved recognition for his role in the influential 1980 television documentary If Japan Can, Why Can’t We?, in which he emphasized the universal applicability of quality management.

So too did kaizen, which influenced a new generation of global thought leaders. Arising out of this rapid expansion of QMS were new systems in the 1970s and ‘80s, including the Six Sigma approach pioneered by Bill Smith and Motorola in 1987. Ishikawa, who saw his reputation and life transformed as his ideas spread worldwide, eventually summed up the explanation as the universality of human nature and its desire to improve. As Ishikawa said, “wherever they are, human beings are human beings”.

In no small part due to the influence of the thought leaders mentioned, quality management systems are today a cornerstone of global business practice. So influential are the innovators of these systems that they are often called ‘gurus.’ But what are the specific benefits of these systems, and how best can they be implemented?

How QMS Benefits Organizations, and the World

The oft-cited benefits of quality management systems are operational efficiency, employee retention, and reduction of waste. From all of these come improvements to the company’s bottom line and reputation. But far from being dry talking points, each benefit not only serves its obvious purpose, but also can dramatically help benefit the planet itself.

Operational efficiency is the measurement, analysis, and improvement of processes which occur within an organization, with the purpose of utilizing data and consideration to eliminate or mediate any areas where current practices are not effective.

Quality management systems can increase operational efficiency by utilizing employee analysis and feedback to quickly identify areas where improvements are possible, and then to guide their implementation.

In a joint study conducted in 2017 by Forbes and the American Society for Quality, 56 percent of companies stated that improving operational efficiency was a top concern; in the same survey, 59 percent of companies received direct benefit to operations by utilizing quality management system practices, making it the single largest area of improvement across all business types.

Because operational improvements inherently reduce both waste and cost, conducting business in a fully-optimized manner can simultaneously save unnecessary resource expenditure, decrease pollutants and discarded materials, and retain more money which the company can invest into further sustainable practices. Efficiency is itself a kind of ‘stealth sustainability’ that turns a profit-focused mindset into a generator of greater good. It is this very point that the

United States government’s Environmental Protection Agency (EPA) has emphasized in their guidance for Environmental Management Systems (EMS). These quality management system guidelines, tailored specifically to benefit operational efficiency in a business setting, are also designed to benefit the global environment by utilizing quality management practices.

Examples in the EPA’s studies in preparing these guidelines showcased areas where small companies could reduce environmental waste, while simultaneously reducing cost, in numerous areas. These added to substantial reductions and savings, such as a 15 percent waste water reduction which saved a small metal finishing company $15,000 per year.

Similarly, a 2020 study by McKinsey & Company identified ways that optimizing operations could dramatically aid a company’s sustainability with only small outlays of capital, thereby making environmental benefit a by-product of improved profitability.

Employee retention, and more broadly the satisfaction of employees, is another major consideration of QMS. Defined simply, retention is not only the maintenance of a stable workforce without turnover, but the improvement of that workforce with time as they gain skill, confidence, and ability for continued self and organizational improvement. We may be in the post-Industrial Revolution, but thanks to the ideas of QMS, some of the concept of the craftsperson has returned to modern thinking; the individual, once more, has great value.

Quality management systems aid employee retention by allowing the people of an organization to have a direct hand in its improvement. In a study published in 2023 by the journal Quality Innovation Prosperity, 40 percent of organizations which implemented ISO 9001 guidance for the creation of a QMS reported that the process yielded greater employee retention.

A crucial success factor for employee satisfaction is how empowered the employee feels to apply judgment. According to a 2014 study by the Harvard Business Review, companies which set clear guidelines, protect and celebrate employee proposals for quality improvement, and clearly communicate the organization’s quality message while allowing the employees to help shape and implement it, have by far the highest engagement and retention rates. The greatest successes come from cultures where peer-driven approaches increase employee engagement, thereby eliminating preventable employee mistakes. Yet the same study also pointed out that nearly half of all employees feel their company’s leadership lacks a clear emphasis on quality, and only 10 percent felt their company’s existing quality statements were truthful and viable.

Then as now, the need to establish a clear quality culture, to manage and nurture that culture, and to empower the participants is critical to earning the trust of the employee participants and thereby retaining workers who in time can become the invaluable craftspeople of today.

Finally, there is the reduction of waste. Waste can be defined in many ways: waste of time, waste of money, waste of resources. The unifying factor in all definitions is the loss of something valuable, and irretrievable. All inevitably also lead to the increase of another kind of waste: pollution and discarded detritus which steadily ruin our shared planet.

Reducing waste with quality management can take many forms, but ultimately, all center on the realization of strategies which use only what is truly needed. This can mean both operational efficiencies and employee quality, as noted above. The Harvard Business Review survey identified that in 2014, the average large company (having 26,000 employees or more) loses a staggering $350 million each year due to preventable employee errors, many of which could be reduced, mitigated, or eliminated entirely with better implementation of quality management.

This is waste on an almost unimaginable financial scale. Waste eliminated through practices which emphasize efficiency and sustainability, as noted in the McKinsey & Company study, can also yield tremendous savings. In one example, a company which purchased asphalt and previously prioritized only the per-ton price found that, when examining the logistical costs of transporting the asphalt from distant suppliers, they were actually paying more than if they purchased it locally. The quality management analysis they performed yielded them a cost savings, and eliminated 40 percent of the carbon emissions associated with the asphalt’s procurement. In this case, not only was wasteful spending eliminated, but literal waste (pollution) was prevented.

In taking these steps, companies can meaningfully improve their bottom lines, while at the same time doing something worthwhile and beneficial for the planet. That, in turn, helps burnish their reputations. A remarkable plurality of consumers, 88 percent of Americans surveyed in a 2017 study to be exact, said they would be more loyal to a company that supports social or environmental issues.

It is therefore clear that any steps a company can take which save money, improve worker satisfaction, and yield increased positivity in the marketplace are well worth pursuing.

What is the Future of QMS?

Until the 2000s, quality management systems were just that: systems of desirable practices, outlined by individuals and implemented individually. That was the age of the gurus: the visionaries who outlined the systems. But what that age lacked was a practical and easy means for companies, sometimes located far away from direct guidance by the gurus, to implement their teachings.

In the intervening years, technology has radically changed that dynamic. Today, QMS software fills the marketplace, allowing businesses small and large to design and guide their quality management plans. But even these software solutions have not yet solved the last great challenge: personalized assistance in putting standards into practice.

That is why the latest innovations, particularly in artificial intelligence, have the potential to upend the equation. Already, major companies have started to use artificial intelligence in connection with QMS datasets managed by software, utilizing the programs for statistical analysis, suggested improvements, and even prediction of potential faults before they occur.

These are immensely valuable opportunities, hence why huge players such as Honeywell are spending billions of dollars to bring innovative AI technology companies into their platforms to refine existing QMS systems.

But while AI has already begun to significantly affect the biggest players, small and mid-sized companies remain eager, but not yet able, to take full advantage. It is thus the next great revolution for a new evolution of QMS, one which will bring these emerging technologies to all companies, regardless of size or scale. The future of QMS, and therefore the future of efficiency in business, rests upon this shift from companies being the recipients of ‘guru knowledge,’ to themselves being the designers of their own quality-minded futures.

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Onega Ulanova is the CEO of QMS2GO, a provider of quality management systems leveraging AI in manufacturing.

Meet the six startups that will be working with Shell and Greentown Labs for the next six months. Photo via Greentown

6 energy tech startups named to corporate-backed manufacturing accelerator

go make

Greentown Labs has named the six participating climatetech startups for an accelerator for a global energy leader.

Shell and Greentown Labs announced the cohort for Greentown Go Make 2023 — a program designed to accelerate partnerships between startups and corporates to advance carbon utilization, storage, and traceability solutions with manufacturing in mind. Shell, which invests in net-zero and carbon-removal technologies, is hoping to strategically align with startups within carbon utilization, storage, and traceability across the energy transition spectrum.

“At Greentown Labs we recognize and appreciate the role energy incumbents must play in the energy transition, and we’re eager to facilitate meaningful partnerships between these impressive startups and Shell—not only to advance these technologies but also to help Shell achieve its sustainability goals,” Kevin Knobloch, CEO and President of Greentown Labs, says in a news release. “We know carbon utilization, storage, and traceability will play a critical role in our collective efforts to reach net-zero, and we’re enthusiastic about the potential impact these companies can have in that work.”

The cohort, selected from 110 applications, is co-located at Greentown's Houston and Somerville, Massachusetts, locations and includes:

  • Portland-based Caravel Bio is developing a novel synthetic biology platform that uses microbial spores and enzymes to create catalysts that are long-lasting and can withstand extreme conditions and environments.
  • Circularise, which is based in the Netherlands, is developing a blockchain platform that provides digital product passports for end-to-end traceability and secure data exchange for industrial supply chains.
  • Corumat, based in Washington, converts organic waste into high-performance, insulating, greaseproof, and biodegradable packaging materials.
  • Cambridge, Massachusetts-headquartered Lydian develops a fully electrified reactor that can convert a variety of gaseous, non-fossil feedstocks into pure syngas with high efficiency.
  • Maple Materials from Richmond, California is developing a low-cost electrolysis process to split carbon dioxide into graphite and oxygen.
  • Ontario, Canada-founded Universal Matter develops a proprietary Flash Joule Heating process that converts carbon waste into high-value and high-performance graphene materials to efficiently create sustainable circular economies.

The program, which includes $15,000 in non-dilutive stipend funding for each company, will work closely with Shell and Greentown over six months via mentorship, networking opportunities, educational workshops, and partnership-focused programming to support collaboration. Go Make 2023 concludes with a showcase event on March 27 at Greentown Labs’ Houston location.

This week, Shell announced another accelerator cohort it's participating in. The Shell GameChanger Accelerator, a partnership with the U.S. Department of Energy’s National Renewable Energy Laboratory (NREL), named four West Coast climatetech companies: DTE Materials, Hexas Biomass, Invizyne Technologies, and ZILA BioWorks. The program provides early-stage cleantech startups with access to experts and facilities to reduce technology development risk and accelerate commercialization of new cleaner technologies.

“Tackling the climate challenge requires multifaceted solutions. At Shell, we believe technology that removes carbon dioxide from the atmosphere will be essential for lowering emissions from energy and chemical products,” Yesim Jonsson, Shell’s GCxN program manager, says in a statement. “The companies in GCxN's sixth cohort embody these objectives and have the potential to usher in a more sustainable future.”

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This article originally ran on EnergyCapital.

The 130,000-square-foot Resilience Manufacturing Hub is coming to the Second Ward. Photo houston.org

$32M resilience-focused hub to rise in Houston's East End

coming soon

A first-of-its-kind manufacturing hub designed to “future proof” residential, commercial, industrial, and public sector infrastructure is coming to Houston.

The 130,000-square-foot Resilience Manufacturing Hub will house functions such as R&D, manufacturing, and assembly for products aimed at improving the resilience of homes, office buildings, warehouses, and other components of the “built environment.”

“We are looking for any product or technology solution that can reduce the impact from the next generation of disasters … by helping people thrive, not just survive, in their own community,” says Richard Seline, co-founder and managing director of the Houston-based Resilience Innovation Hub. The innovation hub is a partner in the manufacturing hub.

Seline says the manufacturing hub, with an estimated price tag of $32 million, will directly employ about 60 people. He expects the facility to either generate or “upskill” about 240 off-site jobs.

The manufacturing hub will be built adjacent to the 300,000-square-foot East End Maker Hub, which is opened in Houston’s Second Ward neighborhood two years ago. Seline says five companies already have expressed interest in being tenants at the manufacturing hub, which is set to open by next summer.

The East End Maker Hub, a public-private endeavor, opened in the summer of 2021. Photo by Natalie Harms/InnovationMap

“We know that the supply chains keep failing over and over again in regard to responding to and rebuilding after disasters. This is a way to address that,” Seline says of the manufacturing hub.

Aside from the innovation hub and East End Maker Hub, partners in the manufacturing venture are the nonprofit Urban Partnerships Community Development Corp. (UPC) and modular construction company VEMAS. UPC is based in Houston, and VEMAS has a Houston office.

“The Resilience Manufacturing Hub is one of four pillars in UPC’s vision for an Invest Houston strategy to grow our economy from within by directly impacting middle-income employment — vital for the 1 million jobs projected as a gap in greater Houston’s long-term competitiveness,” says Patrick Ezzell, president and chairman of UPC and founder of the East End Maker Hub.

The manufacturing hub will work hand in hand with the innovation hub. The innovation hub assesses and addresses risks triggered by climate-produced, manmade, pandemic-related and cybersecurity threats. Hub participants work on innovations aimed at alleviating these risks.

In 2012, the National Academy of Sciences defined resilience as “the ability to prepare and plan for, absorb, recover from, and more successfully adapt to adverse events.” Those events include hurricanes and floods.

The resilience movement got a substantial boost last year thanks to passage of the federal Community Disaster Resilience Zones Act. The law allows for designation of resilience zones in communities that are at high risk of natural disasters and have limited resources. These zones will qualify for federal funding earmarked for resilience efforts.

Harris County scores nearly 98 out of 100 on the National Risk Index, generated by the Federal Emergency Management Agency (FEMA), putting it into the “very high” risk category for natural hazards.

Yet Harris County ekes out a score of 12.73 out of 100 for community resilience, landing it in the “very low” category. This means the county has a poor ability to prepare for natural hazards, adapt to changing conditions, and withstand and recover from disruptions.

Richard Seline is the co-founder and managing director of the Houston-based Resilience Innovation Hub. Photo courtesy

Friday, October 1, is Manufacturing Day Houston at East End Maker Hub. Image courtesy of EEEMH

Houston has all the ingredients to thrive as a manufacturing hub, says expert

guest column

Manufacturing is critical to building the economy on both local and national levels.

According to Deloitte and The Manufacturing Institute, 4.6 million U.S. manufacturing jobs will be needed by 2030. The National Association of Manufacturing estimates that each $1 spent in manufacturing adds $2.79 to the economy and each $1 earned in direct manufacturing labor income yields $3.14 in labor income elsewhere. Failing to fill these jobs could cost the U.S. $1 trillion and thwart economic growth.

Manufacturing is a win-win for Houston. With Houston's manufacturing sectors tied to the overall U.S. economy, the Greater Houston area has the opportunity to thrive as a manufacturing powerhouse by returning manufacturing to the U.S.

"Houston is an amazing city with a wide variety of entrepreneurs, inventors and industry specialties. To support these firms, we need tens of thousands of skilled employees in a plethora of manufacturing jobs. On the product side, they include Space, Medical Devices, Robotics, Additive Manufacturing, BioEngineering, and next generation energy devices. From the process side - refined products, chemicals, beverages and plastics," said Michael Holthouse, CEO and founder of Holthouse Foundation For Kids.

In an effort to increase awareness of these advanced manufacturing careers, TXRX East End Maker Hub is hosting Manufacturing Day Houston on Friday, October 1. The event is attracting hundreds of middle- and high-school youth along with their teachers from the Greater Houston area.

EEMH is opening its doors to allow students the opportunity to engage in hands-on experiences, demonstrations, and interact with subject matter experts to learn the latest technologies in Process Manufacturing, Product Manufacturing, Bioengineering, Virtual Reality, Robotics, 3D printing and more. The keynote speaker, Jim "Mattress Mack" McIngvale of Gallery Furniture, will open the event.

Manufacturing Day Houston is a local effort to join National Manufacturing Day and Creators Wanted, both industry initiatives supported by the National Association of Manufacturers and the Manufacturing Institute. Manufacturing Day Houston has been created to reshape the perception of the advanced manufacturing industry and help today's youth understand how they can match their talents with in-demand product and process manufacturing careers that average $87,185 annually.

While attractive, many of these skilled manufacturing jobs go unfilled due to misinterpretations about the industry and educational opportunities. Houston's community colleges and technical programs offer affordable training for these opportunities, which can be completed in two years or less.

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Michelle Wicmandy serves as a marketing consultant for Imagina Communications.

Rice Business Professor Amit Pazgal found that in certain situations, gray markets can actually help manufacturers and retailers. Photo by Science in HD on Unsplash

Rice University researcher reveals the benefits to unauthorized manufacturing markets

Houston voices

A camera store in Taiwan buys Nikon cameras from an electronics shop in the Philippines, where photo equipment is cheaper. Then the store sells them to consumers in Taiwan at a lower price. The camera comes without a warranty and instructions are in Filipino – the buyers in Taiwan are happy to have a real Nikon for a lower cost.

The sellers and customers are operating in the so-called gray market – where genuine products are sold through unauthorized channels. Gray marketers buy goods in markets with lower prices, then ship them to a market with higher prices, where they will likely sell for a profit. Though the products are identical, consumers typically see gray market goods as inferior since they often lack benefits like after-sale services or warranty coverage.

For years, gray markets have posed a significant threat to both manufacturers and retailers, depriving both of customers and profits. It's estimated that around $7 billion to $10 billion in goods enter the U.S. market through gray market channels every year. The IT industry, for one, loses approximately $5 billion a year due to gray market activities.

No specific laws in the U.S. ban this practice outright, however. As a result, in recent years, retailers are increasingly taking advantage of potentially cheaper prices abroad, personally importing or using third parties to buy original goods not meant for direct sale in the United States – and then selling them here for less. Alibaba, China's most extensive online shopping site, offers its hundreds of millions of shoppers a large array of gray market goods to peruse.

Manufacturers usually respond to gray markets with knee-jerk hostility, urging customers to avoid gray market goods and even filing lawsuits against gray market peddlers. Nikon, for example, includes a website section to educate consumers on how to identify gray market products, to shun the gray market.

But is gray market commerce always destructive? Rice Business Professor Amit Pazgal joined then-Rice Business Ph.D. student Xueying Liu (now an assistant professor at Nankai University) to explore scenarios in which gray markets could be good for both manufacturers and retailers. Testing the theory in recent research, Pazgal and Liu found that there are indeed situations in which both manufacturers and retailers can profit thanks to gray markets, while the associated product also improves in quality.

To reach these conclusions, the researchers started by recruiting 118 participants between the ages of 25 and 45 to complete a gray market product survey. They found the majority had no problem buying gray market goods. Only 3 percent of consumers wouldn't consider buying cosmetics from a gray marketer, while 6 to 7 percent wouldn't buy electronics. Despite this, more than 90 percent of participants who were willing to buy required a price discount of 20 to 30 percent, showing the goods were seen as slightly inferior.

The researchers then tested responses to a model of a manufacturer selling a single product to two markets – or countries – that differed in size and in customer willingness to pay for the product. Consumers in one market would pay more, on average, for quality. For example, the Nikon D500 camera is sold for a 7.5 percent premium in Taiwan versus Thailand and a 10 percent price premium in Taiwan versus the Philippines.

Pazgal and Liu found that when the manufacturer sells their product directly to consumers in both markets when there is also a gray market, both the manufacturer's profit and product quality decrease. But when the same manufacturer sells their product indirectly to a retailer in at least one of these markets, both the manufacturer's and the retailer's profits can increase. So can the product's quality.

This occurs for several reasons. First, gray marketers increase total demand and profit for the retailer in the lower-priced market, or in the market where the gray marketer buys their goods. The manufacturer can set a higher wholesale price for the better quality product in a market where consumers pay more, and increase sales in both markets as consumers compare the regular, high-quality product to the gray market one. In fact, by offering a lower-priced, lower quality (that is, gray market) alternative to its own high-quality product, the manufacturer can better segment consumers in the higher-priced market.

Finally, the retailer in the higher-priced market becomes more profitable even though they lose some customers to the gray market. This is because increased product quality and price more than make up for lost sales. Researchers found that the results hold regardless of whether the gray marketer buys from the manufacturer or a retailer.

The bottom line: in certain situations, gray markets can improve profitability for both manufacturers and retailers (and, of course, the gray marketers). Counterintuitive though it is, manufacturers that sell through retailers shouldn't automatically see gray markets as an obstacle to their profits, rushing to demand that governments and courts shut them down. Instead, in some cases, companies could do well to embrace these gray markets, because they lead to overall improved profits.

Manufacturers can use this information to their advantage, Pazgal noted. Nikon, for example, could introduce a higher quality camera to the market, allowing it to set even higher wholesale prices and increase sales in both markets, far exceeding the cost of the higher quality product.

For consumers, meanwhile, gray markets are always beneficial because of lower prices. If companies heed Pazgal's findings, however, customers could also benefit from more innovative and higher quality cameras and other merchandise, as manufacturers hurry to create better products to bump up their profits.

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This article originally ran on Rice Business Wisdom and is based on research from Amit Pazgal, the Friedkin Professor of Management – Marketing at the Jones Graduate School of Business.

Misha Govshteyn joins the Houston Innovators Podcast to discuss the evolving electronics manufacturing industry. Photo courtesy of MacroFab

Global electronics manufacturing is changing — and this Houston company is leading the way

HOUSTON INNOVATORS PODCAST EPISODE 87

When the pandemic hit, global supply chains across industries were affected, and major corporations and consumers alike continue to be affected — especially when it comes to manufacturing.

In March, General Motors had to shutdown production at three factories due to the global shortage of semiconductors, while gaming systems like PlayStation and Xbox are dealing with a chip shortage that will affect production into next year.

Houston-based MacroFab has a solution. The company has developed a software solution and digital platform to optimize electronics manufacturing by creating a network of factories across North America. The growing business, which was founded in 2013 by Chris Church, saw a setback at the beginning of the pandemic just like most industries. But, Misha Govshteyn, CEO of MacroFab, says the company finished last year on track.

"We really reignited our growth in the second half of 2020 just as the economy started to reopen," Govshteyn says on this week's episode of the Houston Innovators Podcast. "We had about 100 percent growth in the second half of the year, and that really led to our ability to close our most recent round."

That round — a $15 million series B — was led by New Jersey-based Edison Partners. ATX Venture Partners also participated, along with strategic investor Altium Limited, a leader in the electronics design software space. Govshteyn says that it's an important moment for MacroFab to prove out its solution to manufacturing.

"In a lot of ways, the concepts we've been talking about actually crystalized during the pandemic. For a lot of people, it was theoretically that supply chain resiliency is important," Govshteyn says. "Single sourcing from a country halfway around the world might not be the best solution. ... When you have all your eggs in one basket, sooner or later you're going to have a break in your supply chain. And we've seen nothing but breaks in supply chains for the last five years."

For years, global manufacturers have faced supply chain challenges with tariffs, and the pandemic and its accompanying shutdowns took these challenges to a whole new level.

"Supply chains haven't recovered — if anything, things have gotten worse. It's a perfect storm of customers realizing they have to rethink the way they source products," Govshteyn says.

One of the ways to bring the logistics of the process into the modern era. Some industries, like plastics manufacturing, are already doing this, Govshteyn says, but MacroFab has a huge opportunity within electronics.

"We think everything's going to look like a cloud service in the future. Everything is going to be software-driven, and API-addressable," Govshteyn says. "We're staking a claim to electronics manufacturing being one of those areas — and we're still the only company doing so."

Govshteyn shares more about the manufacturing business and the role Houston is playing on the episode. Listen to the full interview below — or wherever you stream your podcasts — and subscribe for weekly episodes

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Booming Houston suburb, other Texas towns among the fastest-growing U.S. cities in 2023

by the numbers

One Houston suburb experienced one of the most rapid growth spurts in the country last year: Fulshear, whose population grew by 25.6 percent, more than 51 times that of the nation’s growth rate of 0.5 percent. The city's population was 42,616 as of July 1, 2023.

According to U.S. Census Bureau's Vintage 2023 Population Estimates, released Thursday, May 16, Fulshear — which lies west of Katy in northwest Fort Bend County - ranked No. 2 on the list of fastest-growing cities with a population of 20,000 or more. It's no wonder iconic Houston restaurants like Molina's Cantina see opportunities there.

The South still dominates the nation's growth, even as America’s Northeast and Midwest cities are rebounding slightly from years of population drops. The census estimates showed 13 of the 15 fastest-growing cities in the U.S. were in the South — eight in Texas alone.

The Texas cities joining Fulshear on the fastest-growing-cities list are:

  • Celina (No. 1) with 26.6 percent growth (42,616 total population)
  • Princeton (No. 3) with 22.3 percent growth (28,027 total population)
  • Anna (No. 4) with 16.9 percent growth (27,501 total population)
  • Georgetown (No. 8) with 10.6 percent growth (96,312 total population)
  • Prosper (No. 9) with 10.5 percent growth (41,660 total population)
  • Forney (No. 10) with 10.4 percent growth (35,470 total population)
  • Kyle (No. 11) with 9 percent growth (62,548 total population)

Texas trends
San Antonio saw the biggest growth spurt in the United States last year, numbers-wise. The Alamo City added about 22,000 residents. San Antonio now has nearly 1.5 million people, making it the the seventh largest city in the U.S. and second largest in Texas.

Its population boom was followed by those of other Southern cities, including Fort Worth; Charlotte, North Carolina; Jacksonville, Florida; and Port St. Lucie, Florida.

Fast-growing Fort Worth (978,000) surpassed San Jose, California (970,000) to become the 12th most populous city in the country.

Meanwhile, population slowed in the Austin area. Jacksonville, Florida (986,000), outpaced Austin (980,000), pushing the Texas capital to 11th largest city in the U.S. (barely ahead of Fort Worth).

Population growth in Georgetown, outside Austin, slowed by more than one-fourth its population growth in 2022, the report says, from 14.4 percent to 10.6 percent. It's the same story in the Central Texas city of Kyle, whose population growth decreased by nearly 2 percent to 9 percent in 2023.

Most populated cities
New York City with nearly 8.3 million people remained the nation's largest city in population as of July 1, 2023. Los Angeles was second at close to 4 million residents, while Chicago was third at 2.7 million and Houston was fourth at 2.3 million residents.

The 15 populous U.S. cities in 2023 were:

  1. New York, New York (8.3 million)
  2. Los Angeles, California (4 million)
  3. Chicago, Illinois (2.7 million)
  4. Houston, Texas (2.3 million)
  5. Phoenix, Arizona (1.7 million)
  6. Philadelphia, Pennsylvania (1.6 million)
  7. San Antonio (1.5 million)
  8. San Diego, California (1.4 million)
  9. Dallas (1.3 million)
  10. Jacksonville, Florida (986,000)
  11. Austin (980,000)
  12. Fort Worth (978,000)
  13. San Jose (970,000)
  14. Columbus, Ohio (913,000)
  15. Charlotte, North Carolina (911,000)

Modest reversals of population declines were seen last year in large cities in the nation's Northeast and Midwest. Detroit, for example, which grew for the first time in decades, had seen an exodus of people since the 1950s. Yet the estimates released Thursday show the population of Michigan’s largest city rose by just 1,852 people from 631,366 in 2022 to 633,218 last year.

It's a milestone for Detroit, which had 1.8 million residents in the 1950s only to see its population dwindle and then plummet through suburban white flight, a 1967 race riot, the migration to the suburbs by many of the Black middle class and the national economic downturn that foreshadowed the city's 2013 bankruptcy filing.

Three of the largest cities in the U.S. that had been bleeding residents this decade staunched those departures somewhat. New York City, which has lost almost 550,000 residents this decade so far, saw a drop of only 77,000 residents last year, about three-fifths the numbers from the previous year.

Los Angeles lost only 1,800 people last year, following a decline in the 2020s of almost 78,000 residents. Chicago, which has lost almost 82,000 people this decade, only had a population drop of 8,200 residents last year.

And San Francisco, which has lost a greater share of residents this decade than any other big city — almost 7.5 percent — actually grew by more than 1,200 residents last year.

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This article originally ran on CultureMap.

How this Houston clean energy entrepreneur is navigating geothermal's hype to 100x business growth

houston innovators podcast Episode 237

Geothermal energy has been growing in recognition as a major player in the clean energy mix, and while many might think of it as a new climatetech solution, Tim Latimer, co-founder and CEO of Fervo Energy, knows better.

"Every overnight success is a decade in the making, and I think Fervo, fortunately — and geothermal as a whole — has become much more high profile recently as people realize that it can be a tremendous solution to the challenges that our energy sector and climate are facing," he says on the Houston Innovators Podcast.

In fact, Latimer has been bullish on geothermal as a clean energy source since he quit his job as a drilling engineer in oil and gas to pursue a dual degree program — MBA and master's in earth sciences — at Stanford University. He had decided that, with the reluctance of incumbent energy companies to try new technologies, he was going to figure out how to start his own company. Through the Stanford program and Activate, a nonprofit hardtech program that funded two years of Fervo's research and development, Latimer did just that.

And the bet has more than paid off. Since officially launching in 2017, Fervo Energy has raised over $430 million — most recently collecting a $244 million series D round. Even more impressive to Latimer — his idea for drilling horizontal wells works. The company celebrated a successful pilot program last summer by achieving continuous carbon-free geothermal energy production with Project Red, a northern Nevada site made possible through a 2021 partnership with Google.

Next up for Fervo is growing and scaling at around a 100x pace. While Project Red included three wells, Project Cape, a Southwest Utah site, will include around 100 wells with significantly reduced drilling cost and an estimated 2026 delivery. Latimer says there are a dozen other projects like Project Cape that are in the works.

"It's a huge ramp up in our drilling, construction, and powerplant programs from our pilot project, but we've already had tremendous success there," Latimer says of Project Cape. "We think our technology has a really bright future."

While Latimer looks ahead to the rapid growth of Fervo Energy, he says it's all due to the foundation he put in place for the company, which has a culture built on the motto, "Build things that last."

“You’re not going to get somewhere that really changes the world by cutting corners and taking short steps. And, if you want to move the needle on something as complicated as the global energy system that has been built up over hundreds of years with trillions of dollars of capital invested in it – you’re not going to do it overnight," he says on the show. "We’re all in this for the long haul together."

Houston researchers create AI model to tap into how brain activity relates to illness

brainiac

Houston researchers are part of a team that has created an AI model intended to understand how brain activity relates to behavior and illness.

Scientists from Baylor College of Medicine worked with peers from Yale University, University of Southern California and Idaho State University to make Brain Language Model, or BrainLM. Their research was published as a conference paper at ICLR 2024, a meeting of some of deep learning’s greatest minds.

“For a long time we’ve known that brain activity is related to a person’s behavior and to a lot of illnesses like seizures or Parkinson’s,” Dr. Chadi Abdallah, associate professor in the Menninger Department of Psychiatry and Behavioral Sciences at Baylor and co-corresponding author of the paper, says in a press release. “Functional brain imaging or functional MRIs allow us to look at brain activity throughout the brain, but we previously couldn’t fully capture the dynamic of these activities in time and space using traditional data analytical tools.

"More recently, people started using machine learning to capture the brain complexity and how it relates it to specific illnesses, but that turned out to require enrolling and fully examining thousands of patients with a particular behavior or illness, a very expensive process,” Abdallah continues.

Using 80,000 brain scans, the team was able to train their model to figure out how brain activities related to one another. Over time, this created the BrainLM brain activity foundational model. BrainLM is now well-trained enough to use to fine-tune a specific task and to ask questions in other studies.

Abdallah said that using BrainLM will cut costs significantly for scientists developing treatments for brain disorders. In clinical trials, it can cost “hundreds of millions of dollars,” he said, to enroll numerous patients and treat them over a significant time period. By using BrainLM, researchers can enroll half the subjects because the AI can select the individuals most likely to benefit.

The team found that BrainLM performed successfully in many different samples. That included predicting depression, anxiety and PTSD severity better than other machine learning tools that do not use generative AI.

“We found that BrainLM is performing very well. It is predicting brain activity in a new sample that was hidden from it during the training as well as doing well with data from new scanners and new population,” Abdallah says. “These impressive results were achieved with scans from 40,000 subjects. We are now working on considerably increasing the training dataset. The stronger the model we can build, the more we can do to assist with patient care, such as developing new treatment for mental illnesses or guiding neurosurgery for seizures or DBS.”

For those suffering from neurological and mental health disorders, BrainLM could be a key to unlocking treatments that will make a life-changing difference.