Manufacturing strategies in the global environment

Manufacturing strategies in the global environment

Click for Jim Pinto Biography

Published November 13, 2007
 
Over the past decade, many companies have adopted new strategies for manufacturing, which has taken competitiveness on to new planes. A whole array of initiatives have been introduced, collectively labeled "new wave manufacturing."
 
Conventional Manufacturing
 
Manufacturing – the transformation of materials into products – is no longer a primary source of prosperity in the U.S. and almost every advanced economy in the last two generations.
 
The percentage of people employed in manufacturing in the U.S. has declined steadily since the 1960s, from 25% then to less than 10% today. And since perhaps half of the workers in a typical manufacturing firm are involved in service-type jobs, such as design, distribution and financial planning, the true share of workers actually making products is only about 5%. Even China is losing manufacturing jobs – between 1995 and 2002, China lost 15 million manufacturing jobs, compared with just 2 million in the U.S.
 
Discussing manufacturing strategies in the first decade of the new century is somewhat like discussing agricultural strategies at the start of the last century. Farming used to employ some 35% in the US at that time, and now employs less than 2%, generally with a surplus of food and agricultural products.
 
To follow the time-shifted parallel a bit further, at the turn of this new century, agriculture in the U.S. is all about high-tech, bio-tech, and info-tech. There’s a continued trend toward fewer, larger, and more specialized production units, continuing until a half-dozen or so large, multinational corporations control virtually all processing and distribution of agricultural commodities in a single global food and fibers market. Also there’s increasing vertical integration of production, processing, and distribution functions, and increasing reliance on bio-tech and information technologies at all levels within the global agricultural system. One wonders how much of that is prescient for industrial manufacturing in this century.
 
Manufacturing Strategies in the New Environment
 
Speed, quality, service, flexibility and global focus are identified as the essential elements for successful manufacturing for the next decade. Manufacturers are measured by their ability to respond quickly to sudden, often unpredictable changes in customer needs and wants.
 
In this new era, manufacturing strategy can be defined as a set of coordinated objectives applied to manufacturing functions and aimed at securing sustainable advantage over competitors. Issues generally addressed include: Manufacturing capacity, production facilities, technology advances, vertical integration, quality, production planning/materials control, organization and personnel. Of course, the strategic approach must be combined with a pragmatic approach to continuous improvement at an operational level to ensure competitiveness in global markets.
 
A key part of a manufacturing strategy is the definition of whether products will continue to be produced at the traditional manufacturing sites, or if the cost advantages make it beneficial to set up manufacturing in geographic areas with a lower cost base. The Boston Consulting Group, among others, has advocated that not considering this strategy is tantamount to giving up on a major cost benefit.
 
The initial rush to offshore manufacturing has given way to a more cautious approach. Many companies are taking into account the practical and logistical difficulties and the full financial implications of setting up and operating facilities in remote countries. Greater care is being taken to ensure that product quality issues are properly addressed in the outsourcing or off-shoring exercise, along with recognition of the requirement for active management and control.
 
The China Challenge
 
The key strategic objectives remain – how are manufacturing firms supposed to compete with the low-priced goods coming into this country from China? How to beat overseas suppliers that can deliver products for prices that are perhaps 30% lower, because China manufacturers accept much lower profit margins? What can smaller firms in the U.S. do when their domestic customers are moving production and assembly operations out of this country to take advantage of irresistible cost advantages? Manufacturers must strive to identify customer values that offer advantages.
 
China has cheap labor, low cost of capital and improving capabilities in the areas of quality and technology as well as a government-sponsored competition. The result is that, when it comes to large volume production of standard design goods, Chinese manufacturers are tough to beat. But, by that same token, they really don’t wish to compete for low-volume and high-variability business.
 
Study your existing and prospective customers. Which among them can afford long lead times after they order the product? The customers that constantly demand quick delivery will have difficulty making a switch to Chinese sourcing.
 
Tactical Solutions
 
The trend over the last several years has been for companies to manage their inventories very tightly to keep costs down. If there is any unpredictability in demand, it is difficult to rely on suppliers that will take months to respond to their needs. In dealing with this uncertainty, they cannot expect a supplier to keep buffer stocks to meet their changing demands, with inventory liability if the market dictates that products must change. The ability to provide fast delivery presents an opportunity to offer significant value beyond the actual price of the products supplied.
 
So, offer customization, modifications and quick product improvements in response to market demands. Search for customers that have this need. They will be more loyal to demonstrated ability for fast turn-around on modifications and improvements. For the supplier, this means developing the ability to modify production quickly. All employees should recognize that this represents the company’s strengths, and every customer change-request should be welcomed as a compliment to the company’s ability to accommodate them.
 
Suggestions for small manufacturers: Look for customers that view your company as a valuable partner in their product development and design process. In the interest of cost cutting, many of customers may have cut back in some areas crucial for product development. Seek to develop process capabilities and areas of technological expertise that fill these gaps. Once you feel you have the potential to take over these activities on behalf of your customers, change your sales pitch to convince your customer that you have additional ways to contribute to their long-term health.
 
Mass customization
 
Conventional wisdom demands that the route to achieving reduced manufacturing costs and improving profitability in a company is to focus its activities on a limited range of technologies, volumes, products and markets. However, while customers are becoming ever more demanding about cost, quality and performance, they still demand more variety and product customization, rather than less.
 
In the new-age, companies must adopt manufacturing strategies and production technologies (programmable automation, flexible robotics, etc), which will allow increased manufacturing flexibility and the capability to respond quickly and cost-effectively to demands for product variants or truly customized products.
 
Technology improves Efficiency
 
While the industrial equipment industry has traditionally focused on cost cutting to increase efficiency, the leading companies focus on improving the return on assets. Thriving companies constantly look for ways to become more efficient, and in particular, more efficient than their competitors. For example, GE leads its industry segment in efficiency and still boasts a profit margin that is well above average. Emerson has used efficiency to beat their competitors and realize a more than 10 percent return on assets. Companies that use the Web as a tool to improve processes, channels and human performance, and to collaborate with customers and suppliers, tended to have the strongest financial metrics.
 
Innovation
 
Innovation is mandatory for the long-term survival of any manufacturer. Good companies are motivated to become more innovative to increase productivity. Many automation companies have gone from simply producing and selling products to providing more complex services that address the usage and total life cycle of the product. They have developed smart products designed to increase their customers' productivity and capture valuable data. The key to creating smart products is to not only capture customer information, but also use it to adapt products and services to more precisely meet customers' needs. With products that interact across open platforms and provide new opportunities, the solutions may be more valuable to the customer than the product itself.
 
Truly innovative companies create a major segment of their revenue from products designed within the past five years, unlike other companies that derive much of their revenue from older technology, with too little invested in improvement or enhancement over the years. Schneider Electric and ABB are two companies that stand out in the area of R&D. Schneider has approximately 3000 engineers and 400 team members focused on R&D across 20 countries. ABB allocates more than 8% its revenue and 20 percent of its corporate resources to new product exploration and experimentation.  And most leading companies are using eCommerce and the Internet.
 
Global expansion
 
While many companies derive a majority of their revenue in their home region, those that generate more than half elsewhere are in a much better position to withstand regional and cyclical downturns. Japanese companies, like Yokogawa, for example, which derives a major portion of revenues in its own domestic markets, has not performed well in the past. They are now striving for geographic expansion, with an aggressive promise to be the worldwide process controls leader within just a few years. Siemens has recently managed to generate more than half its revenue outside Germany, and is better positioned to ride out cyclical demand and economic booms and busts while serving an increasingly global customer base.
 
In addition to protecting against economic cycles, global expansion can be a source of growth in a flat market. Getting the first strike advantage in an emerging market can increase sales dramatically; but to sustain results a company has to be well prepared for business outside its home region.
 
Long-term success requires a solid infrastructure and attention to local personnel, political and cultural issues. One way to effectively address these issues and better ensure a quick return on investment is to partner with a company already operating in the geography. With a partner, the time it takes to handle issues such as infrastructure, employee recruitment and housing, and creating sales channels can be shortened dramatically.
 
Focus on Core Markets
 
Good portfolio management requires that companies focus on those businesses that are achieving results, and rid themselves of those units that are not directly related to the core business. ABB stands out as a leader in this arena – the company divested itself of all non-core businesses, and is now focused on automation and power products. Results are excellent – after debilitating losses, the company is now demonstrating excellent growth and profitability.
 
Conclusion
 
Gone are the days when companies could focus strictly on standard products in high-volume, big backlogs, maintenance, re-engineering and cost reduction. While those issues remain critical, the industrial equipment companies that will thrive will be those that can leverage four areas — efficiency, innovation, market focus and global expansion
 
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 Jim Pinto is an industry analyst and commentator, writer, technology futurist, angel investor. You can email him at: [email protected]. Or review his prognostications and predictions on his website: http://www.jimpinto.com/. Review the contents of his new book “Pinto’s Points – How to Win in the Automation Business” at: http://jimpinto.com/writings/points.html