aiming higher: how manufacturers are adding value to their business

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  1. 1. Aiming higherHow manufacturers are adding value to theirbusinessA report from the Economist Intelligence UnitSponsored by
  2. 2. Aiming higherHow manufacturers are adding value to their business Preface A iming higher: How manufacturers are adding value to their business is an Economist Intelligence Unit briefing paper, sponsored by Siemens PLM Software and Microsoft. The Economist Intelligence Unit bears sole responsibility for the content of this report. The Economist Intelligence Units editorial team executed the survey, conducted the interviews and wrote the report. The findings and views expressed in this paper do not necessarily reflect the views of the sponsors.The research drew on two main initiatives. We conducted a global online survey in February- March 2010. In all, 355 executives took part. To supplement the survey results, we also conducted in-depth interviews with senior executives and independent experts knowledgeable in the field of manufacturing. The following individuals were interviewed for this report: l Adam Buckley, head of programmes, The Manufacturing Institute (UK) l Carlos Cordn, professor of manufacturing management, IMD business school (Switzerland) l Matthias Dinse, managing director, AUMA (Germany) l Pat Hassey, chairman, president and chief executive, Allegheny Technologies (USA) l Frank Krause, director of competence development, Staufen (Germany) l Ann Marucheck, chair and professor of operations, technology and innovation management, Kenan- Flagler Business School, University of North Carolina (USA) l Per Hornung Pedersen, chief executive, REpower (Germany) l Mike Zinser, partner, Boston Consulting Group (USA) The author of the report is Sarah Murray and the editor is Iain Scott. Our sincere thanks go to the executives who participated in the survey and interviews for sharing their time and insight. The Economist Intelligence Unit Limited 2010
  3. 3. Aiming higherHow manufacturers are adding value to their business Executive summary As manufacturers nurse their wounds after the worst recession since the 1930s, many are takinga long, hard look at their business models and making some changes. For many companies, this has meant increasing the proportion of revenue generated by non-traditional activities such as service provision. For others, the soul searching has prompted a move from high-volume goods to high-value products.Although some of this was going on before the global financial crisis hit, the downturn has forced manufacturers to step up their flight to value. With orders shrinking and the crisis threatening the security of supply chains, many companies had to rein in their ambitions and focus more narrowly. At the same time, cost-conscious industrial customers started to demand better value for money, such as including post-purchase maintenance servicing as part of the deal.Whether prompted by a fight for survival or a desire to get ahead of the competition, high-value or value-added manufacturing is proving an increasingly popular business model for manufacturers. This means different things to different companiesfrom speed of delivery, high-end products or unique production processes to highly customised packages and environmentally sustainable product lines.What is clear, however, is that organisations once primarily engaged in making products are now also researchers, designers, services providersand even retailers. As they look to increase revenue streams and emerge from recession in a stronger position, manufacturers are redefining themselves as they evolve from being makers of boxed products to sophisticated providers of solutions.This report looks at the strategies companies are embracing as they battle to win market share and how, in the process, they are starting to question the very notion of what it means to be a manufacturer. The key findings from this research are highlighted below. Manufacturers appear to be optimistic about business prospects. Some 61% of respondents to our survey describe their business outlook as good, and that they expect things to continue to improve. Over one-half (54%) are optimistic that the same applies to their sector. This optimism bears out at a macroeconomic level: in the first quarter of this year, world trade rose sharply as business inventories were restocked and confidence picked up again. This is in sharp contrast to a year ago, when barely one- third of manufacturers anticipated an upturn in business within the next year, amidst a general collapse in trade globally. The Economist Intelligence Unit Limited 2010
  4. 4. Aiming higherHow manufacturers are adding value to their business The recession has intensified efforts to target the high ground. In an ongoing flight from volume to value, a growing number of manufacturers are changing their business models to target higher-value products, deliver more customised offerings or bundle in additional services. Such a shift usually requires a greater focus on innovation and more highly skilled workersand both of these trends are in evidence. Despite the tough conditions, a high proportion of manufacturers (40%) invested in research and development (RD) for product and process innovation over the last 12 months, while one in five (19%) took on board additional highly skilled engineers and other workers. Manufacturers are rethinking their supply chains. Alongside this shift towards value-added manufacturing, firms are also rethinking their supply chains. Toyotas fall from grace over quality concerns has raised question marks about the once-heralded lean manufacturing approach. Others are considering suppliers nearer to home, especially as oil prices and related transport costs rise, while many are cutting back on their supply chains. Almost one-half (48%) of executives say they are looking to shorten or simplify their supply chains. Many are simply looking to bring previously outsourced process back in-house. Regardless of the approach taken, suppliers are being squeezed on costs: more than one- half (53%) of respondents say that they will be looking to form partnerships with cheaper suppliers. Cost concerns continue to loom large. Steel, iron ore and copper are just some of the raw commodities, crucial to many manufacturers, that have been rising in cost as the global economy rebounds. A year ago, as credit dried up and banks sought to avoid risk, manufacturers worried most about a lack of access to capital. But as the economy has improved, raw materials costs are back at the top of the agenda, along with transport costs. More than one-half (55%) of manufacturers polled cite rising materials costs as a primary risk, while one in five (22%) cite transport costs as well. Pressure to keep prices low (34%), as well as increased competition and currency fluctuations (both 32%), are other key risks. Firms are reliant on their cash flow and bank loans for working capital. The most common mechanism for funding operations is by far existing cash flow. However, 38% rely on bank loans, which may be a risky strategy in view of the fact that bank financing is likely to be restricted, at least in the UK and Europe, according to Economist Intelligence Unit expectations. Only a few (4%) rely on government subsidies, but more than one-half (57%) of respondents say that government support for firms in the market in which they operate has been either crucial or somewhat important in the last year. The environment is rising up the agenda. Also supporting the notion that there is a flight to value is the finding that more than two-thirds of manufacturers (67%) have already embarked on developing green products or services, or plan to do so. This proportion rises to about nine in ten among companies in the electrical equipment and appliances sector, as well as the textiles sectordriven in part by rising legislative pressure to recycle products and reduce the use of toxic chemicals. This shift towards greener products and services will also add to the need for greater innovation within firmsas well as collaborations with new partners. In addition, the environmental agenda, whether driven by sustainability initiatives or simple cost concerns, is also improving internal processes: 43% of companies plan to cut their energy consumption in the years ahead. The Economist Intelligence Unit Limited 2010
  5. 5. Aiming higher How manufacturers are adding value to their business Key pointsn Manufacturers are emerging from the downturn leaner and hungrier for new markets and closer relationships with customers.n Many are seeking to add value to their business propositions by offering more after-market services or tailored products.n To achieve this, they will need to attract and retain highly-skilled workers.IntroductionSince the beginning of the global economic downturn, manufacturers have been through a harrowing time. From carmakers and yacht builders to technology component producers,many firms have fallen over the edge of the precipice or have had their businesses snapped up bycompetitors, the victims of contracting order books and collapsing supply chains.Even for survivors, recession has had an impact on operations. Companies have looked for ways totrim their operational costs through everything from staff lay-offs and cut-back product ranges topartnerships with cheaper suppliers and energy-efficiency measures. Last year at this time, therewas so much uncertainty that nobody dared to do anything, confirms Carlos Cordn, professor ofmanufacturing management at the IMD business school in Switzerland.One multinational company in the electronics industry even did what Professor Cordn calls theunthinkable and abandoned the idea of an annual budget. But today, the pessimism is not quiteso pervasive. Companies are saying at least they know what is going to happen with a degree ofcertainty, he says. They are more optimistic because they know whats ahead.That optimism