The American Heritage Dictionary defines "inflection point" as "a moment of dramatic change, especially in the development of a company, industry or market."
There can be little doubt that manufacturers today are struggling through a tumultuous inflection point. Consider just a few of the facts and figures. An estimated 2.8 million U.S. manufacturing jobs have been lost over the last 42 months. Manufacturing employment in the U.S. is now at its lowest level in 45 years. Manufacturing production and new hiring remain stagnant, even as the economic recovery gains momentum. None of the 308,000 jobs that were created in March were in manufacturing, according to the Labor Department. And there has been a seemingly unstoppable decline in manufacturing's overall economic contribution. Since 1999, the percentage of U.S. gross domestic product attributed to manufacturing has slid from 16% to 14%. Manufacturing's share of the national income—29% in 1950—declined to 15% in 2000.
The causes of this inflection point are as clear and disruptive as the numbers suggest. A set of pervasive trends—call them business imperatives—is coursing through the manufacturing market. Globalization, competition, price pressure and the pervasiveness of technology itself are re-architecting the market's landscape. Globalization, specifically the aspect of unrelenting competitive pressure from manufacturers in countries with low labor costs, continues to hammer U.S. manufacturers, particularly those producing high-volume commodity products. A recent survey by PricewaterhouseCoopers shows that manufacturing executives consider competition from foreign markets to be the No. 1 factor inhibiting their companies' growth plans over the next 12 months.
At the same time, costs—particularly those not directly related to production—continue to rise dramatically. Increasing regulations, healthcare and legal obligations are, in many cases, offsetting hard-won, automation-enabled productivity benefits. In a report late last year, the National Association of Manufacturers (NAM) estimated that such costs now account for 22% of the total price of production for U.S. companies.
Add to those problems the fact that, for most manufacturers, raising product prices to cover rising costs is simply out of the question. Dramatic productivity improvements—aided mightily by automation—have created an overcapacity of many manufactured products. As a result of this overcapacity, and the expectations of customers who have become accustomed to inexpensive goods, manufacturers have been forced to live with intense pressure on prices. Economists, in fact, estimate that the price of durable goods, adjusted for overall inflation, has fallen by about two-thirds over the past half century.
"There are too many plants, too many cars, too many tires," says Jack Bolick, president of industry solutions at Honeywell (Morristown, NJ). "You can go to any industry today that's not involved in leading-edge advanced technology and that's the trend."
These changes add up to an inflection point for manufacturers because they are not merely a collection of unfortunate yet temporary trends. They are profound, permanent and industry wide. And they mean one thing: The strategies and competencies which manufacturers have relied upon won't guarantee success or even survival over the next 10 years.
"The competitive landscape has changed for good, and it's going to be harder and harder everywhere for everyone," says Anand Sharma, CEO, TMB Consulting Group, and author of "The Perfect Engine," a new book that urges manufacturers to embrace lean manufacturing and build-to-order processes. "From now on, only the most fit will have a chance to survive."
And yet some manufacturers are doing much better than merely surviving. American Axle & Manufacturing Inc. (Detroit), a $3.5 billion maker of automotive drive line systems, has nearly doubled its sales over the last nine years and remained profitable throughout by relentlessly focusing on new product innovation and effectively combining services with its product offerings. Eighty percent of the company's sales now come from products introduced since 1998. Similarly, privately-owned Hayward Industries Inc. (Elizabeth, NJ), a maker of swimming pool heaters and other equipment, has radically reengineered most of its business processes around lean manufacturing principles and, as a direct result, has nearly doubled revenues over the last five years while cutting inventories by about 70%.
What do these manufacturers have in common? They have accepted the idea that they must transform the way they do business. And they have embraced advanced technologies as an integral part of that transformational attitude. As a consequence, they have mastered a new core set of critical competencies that allow them to thrive despite the intense competitive challenges roiling their markets. Manufacturers who emulate these companies by embracing these competencies—and the strategies that underlie them—will stand a much better chance of not just surviving the confluence of competitive changes the industry faces, but it will allow them to dominate the markets in which they compete. In short, these critical competencies define what Managing Automation is calling "Progressive Manufacturers," companies that are ready and able to take on the challenges of tomorrow rather than fighting the battles of yesterday.
"Over the last three years or so, a lot of manufacturers have been almost frozen in place, obsessed with a fixation on cost cutting and incremental improvements rather than innovation and growth" says Dean Teglia, managing partner in New York-based Accenture's North America industrial equipment practice. "Now we're at an inflection point. The question is, How can CEOs and top executives at manufacturing companies crack the code on growth?"
In the following pages, Managing Automation answers that question by detailing the six competencies that manufacturers must master in order to grow and succeed during the next decade. In November's issue, we will profile companies that are embracing these competencies in order to become truly Progressive Manufacturers.
The Key Disciplines
Business Model Mastery
What are customers willing to pay you for? Where does your company add value? What activities would your company be better off farming out to a business partner? Which business partners should you chose? How can you leverage the capabilities of business partners to develop new sources of revenue?
As competition intensifies and originates from all corners of the globe, it will become critical for manufacturing companies to come up with the right answers to these questions. Manufacturers will need to pick and chose wisely where, alongside whom and against whom they will compete. You may not be able to match the prices of super-inexpensive goods flooding your market from offshore. But you can still compete by emphasizing your own core competence in, say, innovative design and rapid new product development. And then you can look to partners or contractors to fill in the blanks, handing off functions like production or logistics where you may not add much value.
"Manufacturing companies will have to get a lot better at creating alliances and dealing with partners," says Accenture's Teglia. "They'll need to develop the ability to effectively evaluate potential sourcing and service providers. Essentially, it means effectively mining value from potential partners."
Detroit-based General Motors' OnStar division is one company that has figured out not only where it adds value but also how to quickly and effectively establish partnerships when needed. The producer of wireless communications systems and services that come in General Motors (GM) cars routinely collaborates with core technology providers and tier-one equipment suppliers to rapidly design new versions of the OnStar system. In the eight years since OnStar first appeared in GM's Cadillac models, the division and its partners have rolled out six new versions of the hardware, software and services that comprise the system. Most recently, OnStar partnered with IBM Corp. (Armonk, NY), which is providing the division with its ViaVoice voice recognition software. ViaVoice will allow users to be understood by the newest version of the OnStar system when they use continuous speech to dictate phone numbers to be dialed. (The old versions required users to pause between each number.) IBM, OnStar and GM's tier-one suppliers collaborated on redesigning GM's car interiors and noise abatement features so that continuous speech would work.
"Our core competency is in integrating new products into another product—vehicles—that are also evolving," says Bruce Radloff, OnStar's chief technology officer. "For that we need to understand the automotive space and changes in key technologies, and we need to know when and how to bring in key partners."
As more manufacturers are faced with the need to build new technologies such as radio frequency identification even into not-so-smart products, the importance of efficiently creating alliances will only grow. "The idea is that you will be constantly looking outside your own four walls asking, ‘Is there outside talent I can bring in to take advantage of an opportunity I otherwise might not be able to grasp?' " says Navi Radjou, vice president of enterprise applications at Forrester Research Inc. (Cambridge, MA)
Innovation Mastery
Many manufacturers have gotten proficient at making continuous, incremental improvements in production processes and product designs. Many, for example, have learned to use Total Quality Management (TQM) and Six Sigma techniques and tools to refine and improve processes. In many cases these processes match, and even surpass the quality standards of offshore competitors. In the hypercompetitive future, however, manufacturers will have to pick up the pace considerably, not only pushing innovation faster but also raising their sights by insisting on radical rather than incremental improvements.
"The only way manufacturers are going to thrive in the future is through constant, high levels of innovation that don't break the bank," says TMB Consulting's Sharma. "That means using the intellectual capacity of everyone in the enterprise. Using their creativity to design for lean manufacturing; using their ability and creative experience to come up with new products that customers didn't even know they needed."
Listening to and acting on the great ideas that employees have has become a way of life—and a foundation for success—at Hayward Industries. Five years ago, management launched a companywide lean manufacturing initiative employing Kaizen tools and techniques. Initially, the effort was seen as an alternative to a $9 million plant expansion. By using small, cross-functional teams to reengineer manufacturing processes, eliminate waste and replace long conveyor belt assembly lines with small cells, the company was able to avoid investing in the new plant.
Hayward didn't stop there, however. The company has continued to use the Kaizen techniques to revamp each of its five plants and just about every process. Altogether, Hayward has held 450 Kaizen events, revamping some processes four times. Currently, for example, the company is applying lean principles to reengineer its customer call center. The goal is to reduce by 50% the time it takes to service each customer. Each time, the company has used the ideas of employees from across the company to make processes better. And it's paid off time and time again. Overall, Hayward has cut its inventory by almost 70%, cut plant space needs by up to 40% and improved productivity by 10 to 12% per year.
And, perhaps more importantly, Hayward is now better able to respond to customers. Before going lean, the company relied on long production runs. Those long runs meant that one heater plant was able produce only one of Hayward's five models each week. The plant produced 150 heaters per day. Now, in the same space and with fewer people, Hayward is able to change production runs every other day, producing 250 heaters per day. The goal is to be able to produce a different heater model each day by the end of this year.
The key to successful innovation? Listening to employees' good ideas, targeting big improvements and sticking with it even if, in the short run, production is threatened. "A lot of companies start out, then walk away from it after three or four months," according to Hayward's Paul Adelberg, vice president, lean technology. "You've got to pick your best people to be leaders in each plant. And you've got to get everybody to believe."
That kind of continuous and ambitious innovation is, in the end, the best competitive weapon. "There's always going to be someone who will be able to produce commodity products more cheaply, but the know-how, the intellectual property that you can cultivate and bring to bear can't be replicated," says Tom Duesterberg, president and chief executive officer of the Manufacturers Alliance (Arlington, VA).
Customer Mastery
Customers aren't what they used to be. In case you haven't noticed, they're demanding more. And, with few exceptions, they're getting what they want: customized products, vendor-managed inventory, full lifecycle product management and guaranteed price reductions. If you don't agree to give it, a competitor will.
So, more than ever, knowing what your customers want—and anticipating what they will want tomorrow—is as critical as being able to make a quality product at a low cost. "Manufacturers who understand who their key customers are and what they want, and can translate that quickly into new products or more responsive supply chains are going to win," says Bolick. "Unfortunately, increasing customer intimacy isn't something many manufacturers do very well. Often they're too focused on improving processes within their own four walls and don't spend enough time looking outside."
Officials at consumer packaged goods giant Proctor & Gamble (P&G; Cincinnati) admit that's something they've been guilty of. Like many manufacturers, P&G has historically produced imprecise forecasts and measured itself on internally-focused criteria such as the number of defects coming off assembly lines. That's resulted in high costs and inconsistent customer satisfaction. At any given time, P&G has $3.5 billion tied up in finished goods inventory for at least 65 days, and customers find that the P&G product they want is out of stock about 10% of the time, the company's Global Product Supply Officer, Keith Harrison, told attendees of the National Manufacturing Week convention.
Now, P&G is aggressively attacking those problems by attempting to get much closer to its end customers. P&G is working with retailers to get customer demand information in real time into its SAP applications, then breaking down barriers between production and supply chain processes so it's able to quickly respond to real-world customer demand. The goal: 50% reductions in out-of-stocks, inventories and replenishment times by 2008, says Harrison.
In addition, P&G is making the metrics it uses much more customer-centric. Rather than counting the number of product defects coming off the production line, for example, P&G is now counting the numbers that show up on store shelves. That number can be as much as 20 times as high, says Harrison.
In many cases, Progressive Manufacturers are discovering that what customers really want is not just well-made products delivered on time, but also an array of supporting services. American Axle, for example, has begun offering its engineering expertise to automotive manufacturers who are trying to improve on existing products. In one case, the approach led to a major new contract with DaimlerChrysler after American Axle helped fix a problem on Dodge Ram trucks, says Joel Robinson, president and chief operating officer at American Axle & Manufacturing Inc. Similar efforts by manufacturers to provide customers with a wide range of pre- and post-sale services and support are becoming widespread in industries such as aerospace and defense where, for example, government agencies are looking to outsource a wide range of design and support functions.
"The key is to show the customer what they need before they need it," says Robinson. "They want to shed themselves of a lot of design and development expense, and we feel that expense is well worth taking on to get new business and to grow our existing business."
Supply Chain Mastery
"What do U.S. manufacturers have to do to survive against lower-priced products from China? Achieve faster delivery," says Eliyahu Goldratt, author and originator of the "Theory of Constraints." "It is the only thing that they have inherently that is an advantage over the Chinese because they are closer to their market."
Unfortunately, says Goldratt, most manufacturers haven't begun to cash in on that inherent advantage. A key reason, he says, is because many are locked into back-end enterprise software that assumes a build-to-stock model rather than a demand-driven approach. And, in part, because they've neglected to build responsive, demand-driven processes that include suppliers and customers.
"It's about time that, under the dual pressures [of competitors like Dell and competition from offshore], hopefully not in the very far future, most industries will open their eyes," says Goldratt. (For more on Goldratt's thoughts, see
MA Uncut on
www.managingautomation.com.)
Unfortunately, a study by Forrester Research bears out Goldratt's concerns. According to a survey of manufacturing companies, 92% said their top supply chain priority is improved operational efficiency, while just 23% aspire to reduce time to market. Only 54% want to improve their supply chains in order to improve customer service.
Some Progressive Manufacturers, however, are going for much more than incremental efficiency improvements. Over the last two years, for example, IBM has taken major steps to make its supply chain more consistent, responsive and less costly to operate. The company—which estimates it spends $39 billion per year keeping its supply chain running—has created a single, 19,000-person Integrated Supply Chain business unit, which has designed and implemented consistent supply chain processes across practically all of IBM's product divisions. The unit has also standardized on supply chain software—including SAP, i2, Selectica and Siebel—and has begun to create links that would give the company real-time visibility into not only its suppliers but their suppliers as well. IBM recently said it will use hosted supply chain applications and protocol translation software from E2Open Inc. (Redwood City, CA) to build those links deep into its supply chain.
IBM, though, still has a long way to go. The company doesn't expect its hardware supplier network to be using the E2Open system until the second half of this year. They will be followed by software and services suppliers, says Kevin O'Connell, director of manufacturing and procurement process transformation at IBM.
Still, IBM's supply chain visibility and integration efforts have yielded big results. The company estimates it took $5.6 billion of cost out of its supply chain in 2002, and another $7 billion out last year.
As manufacturers in more vertical sectors begin to achieve such results, customers will expect all suppliers to make their supply chains more responsive. Long lead times and incorrect forecasts will simply become unacceptable.
Integration and Data Mastery
Before manufacturers can begin to fashion integrated, sense-and-respond supply chains, they'll need the raw materials: accurate, up-to-date and complete information. At too many companies, however, a legacy of siloed systems and organizations has put a choke hold on efforts to integrate and make use of critical data. As a recent
Managing Automation survey of readers showed, many manufacturers have fallen behind on projects designed to integrate shop floor and enterprise systems like enterprise resource planning (ERP). And that lack of progress is holding back potentially transformational initiatives such as supply chain integration. (See " Building Bridges,
MA, April 2004, p.16)
"Becoming more customer-focused and building responsive supply chains means you simply must have effective connections between the shop floor and top floor," says Accenture's Teglia. "You can't rely on printed reports and batch-oriented integration anymore. There's no time for that. The buffer's getting squeezed or it's already gone."
Progressive Manufacturers like the Trus Joist unit of Weyerhaeuser Inc. (Boise, ID) know that all too well. Until recently the company was manually entering data from its shop-floor Allen-Bradley ControlLogix processors from Rockwell Automation into an analytic application in order to keep track of unplanned downtime. Not only was the manual entry far too slow and error-prone, the results weren't integrated with the company's home-grown production control system. So Trus Joist had no way to accurately predict downtime or quickly respond to it.
Now, however, the company is rolling out a new standards-based integration platform that can be used to quickly build intelligent links between stove-pipe data sources. Trus Joist is an early adopter of Invensys plc's (London) ArchestrA Industrial Application Server, which it is using to consolidate downtime data from shop floor systems. The data will then be integrated with back office applications using the Illuminator Manufacturing Intelligence Server from Lighthammer Software Development Corp. (Exton, PA) The setup is being rolled out now at Trus Joist's Colbert, GA, plant.
"This will help us make the quantity of products we intended to make and with the quality we want," says Billy Smith, Trus Joist's maintenance and engineering manager. "With the old system we were only marginally able to do that."
Ultimately, manufacturers will need to go well beyond that kind of limited, function-specific integration. They'll need to integrate systems and pull together data from across the enterprise, allowing them to react quickly to changes in customer demand and preferences. In Japan, for example, automotive manufacturer Nissan has launched an aggressive campaign—dubbed Integrated Consumer Ordering Network (ICON)—that integrates the company's customer relationship management, ERP and supply chain systems. ICON, says Forrester's Radjou, will allow Nissan to accurately sense shifts in customer preferences and buying patterns and to quickly make corresponding changes in manufacturing plans and finished goods flows.
"It's no longer just about making existing supply chains marginally more efficient," says Radjou. "It's about making them more flexible so that, ultimately, you're able to better serve the customer."
Training & Education Mastery
Moving to a customer-centric business model and mastering the potential of technology will require a workforce that is equipped to capitalize on these opportunities. The skills shortage and the negative perceptions about manufacturing, which have been persisting for years, must be dealt with more effectively.
The National Association of Manufacturers, in a 2003 report entitled "Keeping America Competitive: How a Talent Shortage Threatens U.S. Manufacturing," says that national demographic shifts will present a major challenge to U.S. manufacturers in the years ahead.
In the next 15 to 20 years, the bulk of the "baby boomer" generation of skilled workers will retire, the report says, and the only source of replacement is from immigration. The NAM report estimates that by 2020, 10 million new skilled workers will be needed. And the jobs that will need to be filled range from machinists, to engineers, to plant managers, to computer programmers and IT professionals, all the way to jobs in human resources and accounting and finance.
In a report with similar findings, the National Coalition for Advanced Manufacturing (NACFAM), in a November 2003 study entitled "Manufacturer's Skills Crisis: Solutions for This National Challenge," says that nearly 60% of the new jobs in the 21st century will require skills held by only 20% of today's workforce.
A fundamental part of the problem, both the NACFAM and NAM reports say, is governmental and educational policies. Among its many recommendations to address these issues, NACFAM says:
- Industry-based skills standards should be integrated into career and technical education programs in high schools and community colleges.
- The federal government should use the tax code to provide incentives for industry to enable the workforce to keep pace with technological changes
- Business, government, labor and education should be more cooperative in improving the public perception of manufacturing and advanced manufacturing careers.
It's that last point in particular that Progressive Manufacturers must rally around. The key to embracing the disciplines of Progressive Manufacturers over the next 10 years may very well hinge on the entry of the next generation of manufacturing workers, managers and executives. But unless the current generation does a better job of improving the image of the industry and promoting manufacturing as a desirable career, graduating classes will go elsewhere.
The Future Can be Bright
All across the country, manufacturers are meeting, discussing and strategizing about how to move forward. It's a future with no shortage of challenges but also one with an abundance of opportunity. From where we sit, the balance is in favor of the latter. With the right mixture of creative thinking, the stamina to see things through and the application of advanced technologies in new and innovative ways, companies that embrace the idea of the Progressive Manufacturer can create that better future.
And the first step is simply to recognize that the competitive landscape has shifted in significant and permanent ways that require transformational ways of thinking and working.
"It's kind of like working your way through the five stages of grief to finally get to acceptance," says Radjou. "A lot of companies today are in the first stage—denial. The question is, How quickly can you progress through the five stages and get ready to act? Those who take too long won't survive."
If the past is prologue, manufacturers who have fought their way through many inflection points over the decades will get the message again this time around. Honeywell's Bolick, for one, is optimistic. "I have a lot of faith that U.S. manufacturers will respond. We've done a better job of innovation than anyone on the planet. We tend to create the next generation of technology. We consume it. And we get to the next level."