future of manufacturing: innovation economy

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Chuck Pharris Manufacturing Solutions Marketing Future of Manufacturing 20+ Years We should all be concerned about the future because we will have to spend the rest of our lives there." -- Charles F. Kettering

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Explores how the fundamental economic determinants of materials, machinery, land, labor, and capital are neutralized over time leaving Enterprise or "Innovation" the only remaining competitive advantage resulting in an Innovation Economy.

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Page 1: Future of Manufacturing: Innovation Economy

Chuck Pharris Manufacturing Solutions Marketing

Future of Manufacturing 20+ Years

We should all be concerned about the future because we will have to spend the rest of our lives there."

-- Charles F. Kettering

Page 2: Future of Manufacturing: Innovation Economy

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Future of Manufacturing? 50 years of predictions*

Fifties n  Improvements in mass production developed during World War II n  Computerization and quality processes are future

* Advanced Technology and the Future of U.S. Manufacturing Georgia Tech Policy Project on Industrial Modernization 2004 ** Automation: Its Impact on Business and People, Walter Buckingham (1961) *** Pavitt, Keith (1973), Technology, International Competition, and Economic Growth: Some Lessons and Perspectives, World Politics, Vol. 25, No. 2. (Jan., 1973)

Sixties n  Focused on automation and its limitations. n  Emphasis on globalization and the future proliferation of multinational corporations. n  ** “Automation could actually increase operating expenses due to loss of flexibility, increased risks,

and time-consuming changeovers.”

Seventies n  Rise of the microprocessor on shop floor. Debate - “deskill the workforce or result in more creative and complex work”. n  Labor-intensive nature of software development costs predicted to increase with absolute costs of software. n  *** Multinational firms moved manufacturing and assembly to less developed countries for lower labor costs.

60’s

Eighties n  Rise of strong Europe and even stronger Japan n  Foreign competition moved from low cost labor to technology adoption and manufacturing techniques n  New materials, computerization of shop floor, computer integrated manufacturing (CIM), quality based practices

Nineties n  http://www n  Race to adopt Japanese management notions into new business and product alternatives n  Technology taxonomies, manufacturing unit processes, industrial ecosystems, corporate merger strategies, outsourced/

contracted R&D, and off-shore workforce tactics.

2000’s n  Globalization, geo-political n  Low-cost competition drove technological forecasts n  New product development technologies, sustainable manufacturing, knowledge management practices, nanotechnology

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20+ Years

Economics & Manufacturing

Economics = production, distribution, and consumption of goods and services.

Macro – Employment, Interest, and Money < ------ > Micro – Economic behavior of agents

Adam Smith David Ricardo John M. Keynes Milton Friedman

Production of Income Land vs

Labor & Capital Investment Needed Shortage of Money Different

Agriculture Mercantile Services Industrial

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Micro-Economics & Manufacturing

Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise

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Raw Materials - Historical

Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise

n  Key determinant of national wealth

n  Drove colonialism, mercantilism, and wars n  Only source of wealth of undeveloped countries

Historical Perspective

Factors of Production

n  All new potential wealth, the foundation of all prosperity, comes from the earth. You can either harvest something or mine something to create new potential wealth.

n  Human labor produces raw materials to create jobs and incomes. This consolidation of human labor producing raw materials enables the economic cycle that manifests new wealth.

n  The economic cycle emerges through the structure of trade. This structure of trade must manifest a sufficient level of wealth to afford all finished goods and services or it becomes unsustainable due to growing debt.

Economics of Raw Materials

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Raw Materials - Trends

Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise

n  Intangibles – Intangible value exceeds tangible n  Sustainability Focus n  Energy – China surpassed US (< per capita)

Current Trends

Intangible vs Tangible Value

Source: Global Intangible Tracker – 2007, BrandFinance WSJ – China Tops US in Energy – July 18, 2010

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Raw Materials - Future

Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise

n  Hoarding – China acquisitions (Canada/Ven/Russia/Australia) n  Localization – Saudi Arabia diversification – naphtha, aluminum n  Money – Factor of Production? (end of mainstream economics?)

n  Geo-politics – Afghanistan minerals

Case for Traditional Role

Hoarding Localization

Money - FOP

Self-sufficiency New materials Intangibles (+)

n  Self sufficiency n  New Materials n  Increase in non-natural resource wealth creation (services,

intangibles)

Case for New Role

n  Strategic risk role of procurement n  Increased emphasis on manufacturing innovation/product design n  Drives localization of manufacturing capability vs mass transfers

n  Crude oil valued as raw material vs energy furthering pressure on shift of transportation fuels

Conclusions: Impact on Manufacturing

Per Commodity

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Machinery

Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise

n  Enabled industrial revolution n  Key to increased productivity in agriculture and industry

Historical

n  Self Assembly n  Nanotechnology n  Bio-inspired manufacturing

n  Opto-electronic materials n  Specialized synthetic membranes

Future – Dramatic Revolution in Mfg Machinery

Genetically Engineered Materials

n  Multi-disciplined – not just engineering n  Reduce need for scale / micro-factories / make to order n  Manufacturing production machinery will become increasingly agile,

flexible, and sophisticated. n  Need for international standards in new production machinery.

Conclusions: Impact on Manufacturing

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Labor Outsourcing and offshoring

Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise

Outsourcing – Not Manufacturing Decline

Source: Comparisons & Analysis of U.S. & Global Economic Data and Trends, SRI Intl. - 2004

Productivity Increases

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Labor Productivity

Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise

Productivity and GDP

Comparison of labor costs in the clothing industry

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Labor

Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise

n  Low cost labor IS current key competitive differentiator of manufacturing n  Automation perceived/concerned as de-skilling n  Full employment is key economic goal

Historical

n  Current developing countries reach relative parity n  Specialization increases as productivity increases n  Geographic diversity increases as knowledge component increases

Future

n  Increased manufacturing productivity in developing countries is correlated in increased personal income levels which drives increased education and skills

n  Localization of manufacturing returns without cost advantage

n  Value focused on IP vs ‘brute force make’ – shifting skills n  Outsourcing productivity benefits replicate in larger role of componentization

n  Instead of deskilling, automation continues to retain productivity with shift of resource focus

Conclusions: Impact on Manufacturing

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n  Customer capital (brands, customer relationships, relationships with marketing and distribution partners etc.), other business partner capital (supplier relationships / supplier network, contract manufacturers etc.)

Capital

Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise

n  Employees’ individual professional expertise and skills, social skills, entrepreneurial engagement, ability to innovate and respond to changes

Human Capital

Relationship Capital

n  Business infrastructure/processes, working methods, information systems, databases, intellectual property (patents, copyrights, trademarks), organizational design, location advantages, corporate culture

Structural Capital

What Are Intangibles?

n  Deleveraging – Growth in Int’l Equity -> Shifts availability to developing countries

n  Equity is more fluid, but more volatile -> caps multi-national consolidation growth

n  Equity capital follows innovation (Apple vs Msoft).

Future

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Land

Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise

n  Drove migration, geopolitics, and wars n  Thomas Malthius - ‘population checked by famine, disease, and widespread

mortality’

Historical

n  Absolute scarcity of land won’t change – §  Other types of ‘land’ (e.g. frequency spectrums, orbital patterns) can be

enhanced through technology and substitution (e.g. digital TV)

§  Demand decreases with increased productivity and technology §  Scarcity is not in absolute terms but in secondary usage resources; water,

access, environmental capacity.

Future

n  Sustainability reaches rapid adoption due to fundamental inherent scarcity n  Continued marginalization of importance of raw land due to shifts in economy (ag->ind->svcs) enabled by technology

sustaining and increasing productivity levels

n  Enables developing countries to accelerate parity with diminished importance on land as scarce item. Enables them to find competitive differentiator without this inherent constraint weighing on them.

Conclusions: Impact on Manufacturing

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Enterprise – (Entrepreneurism)

Micro Economics = Raw Materials + Machinery + Labor + Capital + Land + Enterprise

n  Rapid pace of innovation/design n  Globalization – In innovation vs financial n  Componentization/Specialization

Future

1.  There are innovations that sustain things that already exist: they make things better, they make business models stronger.

2.  Then there are innovations that disrupt what is there: they create markets that didn't exist or they transform markets that do exist by doing things fundamentally differently.

Innovation

Korea Patents Awarded n  Globalization (failed from financial point of view), but continues to thrive from the

innovation point of view. Big push for diversity in large corporations is trying to capture this (not EEOC).

n  Increased product cycle times and make to order capability n  Close integration with customer to realize innovation

n  Must capture value of human, relationship, and structural capital

Impact on Manufacturing

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Summary Global Parity Shifting Competitive Differentiators

Traditional Competitive Differentiator Future Trend

n  Raw material export for wealth creation n  Shift to intangibles n  Sustainability n  Consumed internally

n  Machinery •  IP & Capital were barrier •  Mass production/scale

n  Fluid equity markets n  Manufacturing microtization n  Make to order (mass customization)

n  Low cost unskilled labor in underdeveloped countries

n  Educational and per capita income parity n  Collaborative knowledge worker n  Increased specialization

n  Capital availability n  Fluid equity markets n  Equity capital follows innovation (intangibles)

n  Land – ultimate scarce item n  Marginalization of land with technology n  Global sustainability is required

n  Globalization & multi-national consolidation necessary for growth

n  Globalization is now in innovation n  Parity, microtization, and componentization drive localization n  Componentization and specialization de-emphasize scale

n  Innovation •  Restricted access to IP

n  Developing countries established R&D n  Realization of intangible value (IP/brands) n  Componentization enables de-scaling and localization of

manufacturing n  Consumer driven innovation

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Summary New Innovation Economy

Agriculture Mercantile Services Industrial Innovation Economy

n  Hybrid mix of products and services n  Hybrid manufacturing process focused on componentization n  Rapid product design, delivery, and make to order

n  Core competency of manufacturing: To capitalize on competitive differentiation of innovation economy:

n  Exploitation of Intangibles….human, relationship, and structural

n  Return to physical localization of resources, labor, and manufacturing execution, but still globalized in innovation processes

n  Focus on innovation and customer/consumer intimacy neutralizes dependency on efficiency of scale in corporate size and geographical consolidation of manufacturing types.

Characterized by

“I can make a whole lot more money skillfully managing intangible assets than managing tangible assets”

Warren Buffet, CEO Berkshire Hathaway

For this vision,… second the successful launching of new business models by optimizing intangible assets at the maximum level; …

Hwang Doo-yul Vice Chairman & Executive Officer of SK Corporation Korean Refiner – 45B Assets, #51 of Platts Top 250

Why Humans Succeed: Collective Intelligence

WSJ – May 22, 2010

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