Increasing pressure on manufacturers means riding out new go-to-market challenges.
by Minda Zetlin, August 2013
Running a manufacturing company has never been as complex a challenge as it is right now. Global, geopolitical, economic, and marketplace factors have all combined to make maintaining a company’s value chain—the process of receiving raw materials, turning them into finished products, and then getting those products to customers on time and at a profit—an intricate task requiring robust and powerful technology. Those pressures will only grow over the coming years.
“Complexity in the supply chain is one of the trends we’re seeing—from receiving raw materials to getting finished products to customers on time,” reports Tony Perrigan, group vice president of Oracle’s Enterprise ERP Applications Group. “As complexity goes up, performance is challenged, just when there’s a greater need to be agile.”
Why are manufacturing supply chains seeing such an increase in complexity? As the global economy slowly recovers from the Great Recession, multiple factors are at play: shifts in globalization, rising expectations from B2B customers and consumers, diversifying product lines, mergers and acquisitions, increasing competition, and increased risk.
Having manufacturing operations in multiple geographies is nothing new. But today’s globalization is driven by a completely different dynamic than in the past. “The trend was, ‘How do I move offshore to the country with the lowest labor cost?’” says Lyle Ekdahl, group vice president and general manager of Oracle’s JD Edwards product family. For many companies in North America, that meant operating in China. But as China’s workers now command higher salaries, that country is no longer the low-cost haven it once was, Ekdahl says.
Meantime, transportation costs have gone up, making it less attractive to ship goods around the world. And new customers for many products are appearing in many “emerging” economies. The end result is that, these days, when manufacturers set up shop in China, they’re seeking to reach the Chinese market more than low-cost Chinese workers.
“If I have a long logistics channel—say I’m building a product in China to get it to the United States—it’ll be on a ship for several weeks,” says Bob Monahan, senior director, JD Edwards applications strategy and product management at Oracle. “That costs money. Then it goes onto a train, and then a truck, all of which is costly, too. But if I want to sell that product in the Asia-Pacific region, then it makes a lot of sense.” The same logic holds true for other emerging markets, such as the remaining “BRIC” countries, Brazil, Russia, and India.
Complexity in the supply chain is one of the trends we’re seeing—from receiving raw materials to getting finished products to customers on time.
Building or buying factories in multiple geographic locations is a great way to get products exactly where you want them. But it brings a huge increase in complexity for both the supply chain and managing operations. “Employment laws are different in every part of the world,” notes Perrigan. “The expectations for regulatory compliance are different as well. This adds cost and complexity, which erodes a company’s margin, impacting shareholder value.”
Not only that, but operating in different countries means operating in widely divergent cultures. In some cultures, certain jobs are traditionally done only by women, or by men. In others, extended vacation periods or religious observances can disrupt the normal work schedule in use throughout the rest of the company. “These are all issues you have to face in a global economy,” Perrigan says.
At the same time that manufacturing is becoming more global, retailers and other B2B customers have higher expectations than ever before for quality, accuracy of order fulfillment, and speed. “If a company is delivering to a big retailer, the retailer will ask if you can commit to a certain delivery date,” Perrigan says. “Retailers measure their suppliers’ regular delivery performance.”
How quickly a manufacturer can fill an order is another important question as retailers seek greater agility and flexibility in order to serve rapidly changing consumer desires and to stay competitive. “A company that, because of its complexity, has to have six weeks’ lead time is at a competitive disadvantage compared to one that can deliver in two weeks,” Perrigan adds.
Another measure is perfect order fulfillment—can a manufacturer provide exactly what is ordered in precisely the desired quantity? “Companies aren’t ordering just one product; they want a whole list of things,” he says. “They’ll look at whether a supplier is delivering the way they defined the order. If I ordered 10,000 parts and you delivered 9,000 and kept me waiting six weeks for the remainder, or if you delivered parts I didn’t order, or parts that were faulty, you’re in effect transferring the challenges of your complexity to me.” Most customer companies are less than forgiving in these situations.
While customers are expecting more-accurate, faster deliveries, they’re also asking for more customization. Many retail chains want products configured specifically for their brands, for instance, and some companies expect fleets of cars or trucks configured to their exact specifications. But addressing that demand is at odds with meeting today’s shorter lead times. And it increases the cost of the item by expanding transportation expenses and extending the time inventory is kept on hand. “A customer ordering home appliances might say, ‘We want cases with different colors, packaged with that box delivered to this location. But for that other location, we want a different color packaged with a different box,’” Perrigan says.
Percentage of manufacturers that either recently expanded their workforce or plan to do so in the next 12 months (Source: Travelers Industry Edge survey of 200 manufacturing industry professionals)
The need to provide products designed to a customer’s individual specifications, on time, with high quality and accurately filling the order, and with a shortened lead time puts unprecedented cost and supply chain pressures on manufacturers. According to Perrigan, the way to alleviate that pressure is to create a simple, flexible, and efficient supply chain.
Manufacturing profit margins are traditionally very thin, especially for commodity products. So staying profitable remains a key focus for manufacturers. After years of cutting costs through the economic downturn, most managers have trimmed the fat from their operations. As the economy recovers, they’re looking to ensure profitability by increasing revenues rather than cutting costs.
For most, that means increasing offerings to customers or adding products that complement existing product lines—moves that further complicate systems and supply chains. Specifically, selling replacement parts for existing products can let manufacturers tap into a particularly lucrative business. More companies are offering spare parts or accessories for their products, and they’re learning to price these items based on their worth to customers rather than what they cost to produce.
“I might be willing to pay $20,000 for a replacement part that will keep my business running 24/7 if you can ship it to me overnight,” Monahan says. “It might keep a million-dollar piece of equipment running.”
Some manufacturers are expanding to offer service, maintenance, and installation to existing product offerings—adding new revenue and driving new profit. “Many manufacturing companies sell products that are commodities or like commodities,” Ekdahl says. “If that’s the case, what value-added services can you provide to differentiate yourself?”
The manufacturing industry has seen a wave of acquisitions, and it’s easy to understand why. Economies of scale and greater purchasing power mean that bigger is better in manufacturing. “If you want to be a market leader in an industry, you have to grow in size,” says Ekdahl. “The biggest three or four companies in a segment can dominate price and distribution channels.”
Mergers also allow manufacturers to take advantage of prevailing trends. For example, companies acquired in different geographies almost instantly deliver the benefits of going global. According to Monahan, acquisitions also offer a way to reach ambitious growth goals that are harder to achieve organically. Likewise, acquisitions are a great way to quickly expand a product line.
Also, businesses weakened by the economic downturn present some great buying opportunities. “Just as a rising tide lifts all ships, a low tide challenges all ships,” Perrigan says. “It challenges all companies to be efficient, and the ones that aren’t become prime targets for acquisition.”
Companies that cut spending but maintained market position during the downturn could use cash reserves for acquisitions. Acquiring another company, especially one struggling with inefficiencies, poses an immediate challenge, however. “You may be able to run the new acquisition as a separate company, but the benefit only comes if you combine operations and create efficiencies,” Perrigan says.
Finally, manufacturers need to prepare for potential supply chain interruptions. “We saw this with the tsunami in Japan,” Perrigan says. “Supply chains were disrupted for several industries, which directly impacted the ability to deliver products and meet financial goals.”
I want a single view. If different divisions are purchasing components from the same supplier, I need to know that for bargaining power and economies of scale.
More recently, a buildup of tensions between North and South Korea raised fears that supply chains would be affected or stop altogether if the countries engaged in hostilities. But a disruption might not manifest as international conflict; it could be something more mundane. “What’s the risk if your supplier goes out of business? If the barge carrying your components sinks? You have to be aware of geophysical, as well as local, political risk to your supply chain,” Perrigan notes.
The only way to prepare is to have backups and redundancies in place. “If I can manufacture a part in North America, but also in South Africa and in Malaysia, that minimizes my risk,” Monahan says. However, this too adds complexity.
Technology plays a key role in dealing with these supply chain complexities. For example, it’s essential to have the same IT systems in use across different functions, facilities, and countries, to standardize and combine data. This reduces duplication of effort and the cost of operating multiple systems. But smart integration helps in other ways. “I want a single view,” Perrigan says. “If different divisions are purchasing components from the same supplier, I need to know that for bargaining power and economies of scale.”
And your single system should be fully up to date. “I can’t continue to run my business on spreadsheet software and expect to have real-time information,” Monahan says. “The overall systems—ERP [enterprise resource planning], manufacturing, planning systems—are all key.”
These systems should help you create the agile, flexible supply chain manufacturing needs to succeed in an increasingly complex and competitive world. The modern supply chain should have the capacity to grow and adapt as your company grows and your needs change over time. “There are always competitive pressures, so the need to be efficient is always there,” Perrigan says. “That means you need to constantly innovate in the way you address your supply chain. So you don’t need a system that cripples you and prevents you from doing what you want unless you buy something else.”
Instead, he says, look for standards and systems that will serve your operation well into the future. “We always ask, ‘What are your strategic objectives?’” Perrigan says. “Plan for those, not for what you have today. That will get old very quickly.”
Minda Zetlin is coauthor, with Bill Pfleging, of The Geek Gap: Why Business and Technology Professionals Don’t Understand Each Other and Why They Need Each Other to Survive (Prometheus Books, 2006).
You could have the world’s most efficient factories, but without qualified people to run them, you would still be dead in the water. “Some areas don’t have enough engineering graduates,” says Tony Perrigan, group vice president of Oracle’s Enterprise ERP Applications Group. “Other parts of the world are putting emphasis on engineering. You have to be aware of these dynamics. Workforce is critical to supply chain capacity.”
Managing a workforce across different geographies—within the United States as well as around the world—means dealing with disparate laws and regulations, as well as union and nonunion environments. In today’s world, it also means facing challenges, as many manufacturing companies struggle to recruit and retain the talent they need to keep operations running smoothly.
While there’s no magic fix to the shortage of qualified talent, technology can be a big help. “Not only are there systems to manage payroll and taxes, but also to manage talent and succession planning,” Perrigan says. “That can help you manage those functions more effectively.”
There are also tools to help companies find qualified employees in the first place, using social media connections. “The whole paradigm around recruiting has shifted since the advent of the internet and social media,” Perrigan says. “It’s how technology has really enabled the process.”