This paper examines current approaches to and challenges of town design and management in industrial areas with a large number of small and medium size factories in Japan. We focus on a detailed case study on town design and management in the Takaida district of Higashi-Osaka City. In this paper, the term "Harmonious Coexistence of Housing and Manufacturing" is defined as a conceptual aim of achieving sustainable development and building a “compact city” in an area with a mix of housing and workplaces. The preliminary findings of the study revealed that industrial area has decreased 29%, while residential area has increased 34% between 1983 and 2003.and the mixing of residences and factories has progressed A large number of stakeholders has made it difficult to build consensus for a master plan of the district and there is therefore a need of introducing a new mechanism for drawing up the master plan.