Factories in the world’s largest economy hit hard by the spreading global recession are producing fewer goods than they have in nearly three decades. A report by the Institute for Supply Management, a private research group, finds that manufacturing activity in the United States has fallen to levels not seen since 1980, while prices have sunk to their lowest levels since 1949. This comes after a series of reports showing similar cutbacks in emerging markets, like China and India. A recent Purchasing Managers’ Index says that China is on the verge of ‘a technical recession’, after its manufacturing activity fell for a fifth straight month in December 2008. At the same time, factories in India, Asia’s third-largest economy, are also shedding jobs, prompting India’s central bank to slash key interest rates.
As companies face shrinking consumption (also called deflation), slowing production and declining prices, they will need to assess their entire value chain as they look for ways to keep costs low and improve efficiencies while continuing to innovate. To help address this challenge, this report reflects fresh research undertaken by Capgemini in collaboration with the University of Edinburgh into the ‘Best-in-Class Global Manufacturing Value Chain’.  The specific objectives were to:
The work undertaken in this study has built on the findings of the 2008 report entitled ‘Manufacturing in 2020’ byCapgemini in conjunction with IDG Global Solutions.
This led to the development the global networked value circle model. The best-in-class firms operating in this environment display three essential abilities:
The key findings within the five elements of the value circle are:
The Value Chain
Best-in-class manufacturers tap the world for ideas, with R&D in local companies and dispersed labs Globalisation of industries, usinesses and markets is often discussed, but the globalisation of deas is just as important. For many firms, the era of the global R&D centre or ‘university’ is over. Instead, for industry leaders such as ABB, EADS and Philips, R&D is dispersed across the world in R&D units that can reside within local subsidiary companies, partners or joint venture businesses, or within dispersed research or development units. Close coordination is then maintained so that the developments and ideas in these centres can quickly be shared and exploited across the groups’ worldwide operations. Best-in-class manufacturers use open innovation, taking ideas from anywhere Open innovation is a term coined by Dr Henry Chesbrough, a business professor at the University of California, Berkeley. It is an approach where companies strive to speed up innovation by collaborating with a range of partners. In contrast to the old approach to R&D, where companies sought to protect their core competencies and intellectual property, this new strategy acknowledges that partnering with leading researchers in other businesses, government and universities can make for faster progress. Best-in-class manufacturers take innovative influences from all sorts of people The market for ideas is becoming increasingly open and unconventional for best-in-class manufacturers. Examples include Philips’ drive to gain continual feedback on how well it meets end-user needs through a people-centric approach in its experiences, research and innovations pipeline; HP’s Idea Lab, which allows outsiders to view early-stage innovations through the web and its partnering with fashion designer Vivienne Tam to create accessories and packaging for its notebooks; and student competitions.
Best-in-class manufacturers innovate by collaborating externally while fostering competition internally Competition is an important part of the product design and innovation process. For many companies, this is being internalised. Daimler, for example, nurtures the entrepreneurial spirit by encouraging its designers to compete against one another to have their designs selected for production. Part of the streamlining efforts of R&D processes, competition is used as a way of selecting the best ideas for further research and development.
Best-in-class manufacturers ‘repurpose’ product design and innovation Innovative business does not necessarily mean new products. Companies that have built up a large portfolio of patents, such as HP, can increase their ROI by applying old innovations to different products and services, or by licensing them to other companies in different industries that may have a commercial use for them. Also, research programs in companies can result in patents, but the patents do not always translate into products or services of commercial value. The process of applying old patents and intellectual property to new products and services is known as ‘repurposing.’ In part, this is driven by product lifecycle shrinkage. Manufacturing can take place anywhere where there is a cost advantage. At the moment, it’s in Asia; tomorrow it could be elsewhere. 60 per cent of the firms in the ‘Manufacturing in 2020’ study expected to be sourcing from more companies within the next ten years. We are seeing a transition in best-inclass manufacturing from being manufacturing firms, to being manufacturing management firms. The ‘Manufacturing in 2020' survey also found cost advantages gained from manufacturing in the right location to be one of the main drivers of manufacturing. The need to localise products for local needs is another, which this invariably undertaken by local companies. The choice between in-sourcing and outsourcing seems to be a function of size and complexity. Firms with a focused product range may choose to in-source, while firms producing a wide range of technical products choose to outsource. In a world where the advancement of technology continues apace, collaborative manufacturing arrangements are seen as a valuable source of learning. Best-in-class manufacturers regard themselves less as manufacturers, but more as manufacturing managers Outsourcing is now wellestablished. Philips decided in 2001 that it would outsource basic manufacturing and become a technology developer and global marketer, and by 2006, about 70 per cent of manufacturing was outsourced. Leading manufacturers are evolving from being manufacturing companies to being manufacturing management companies. Philips now has a major outsourcing contracts management business activity, with a governance council to manage it. While many hold on to core activities such as R&D, marketing and finance, increasingly even aspects of intellectual property such as design and engineering are outsourced. Best-in-class manufacturers actively seek location advantages by offshoring For most manufacturers, keeping costs low has meant relocating production and manufacturing to overseas locations such as India and China. All the manufacturers surveyed in the ‘Manufacturing in 2020’ study expect to rely more on overseas suppliers in coming years. But in many industries, proximity to markets is important for manufacturing location, especially those where distribution costs are substantial. Distribution can account for 30 per cent of automobile costs, so eastern Europe has become an attractive manufacturing location for western European markets, while the southern United States holds a comparative advantage over the northern United States.
Best-in-class manufacturers collaborate to win by learning and innovating Significant gains can include increasing innovation, improving quality and reducing costs through inter-firm learning. Even though the potential benefits of collaborating are significant, much collaboration continues to fail. When done properly, collaborations, even with competitors, can result in the unleashing of synergies and the generation of new products and processes for the participants.
Best-in-class manufacturers actively manage the tension between customisation and standardisation Customisation provides for consumer choice, but it also increases costs. Standardisation, while important for driving costs down, reduces consumer choice. But standardising products around functional areas such as common production platforms allows greater flexibility when demand fluctuates and reduces the dichotomy between standardisation and customisation. Automotive and computer manufacturers, for xample, are standardising production platforms globally. By taking control of procurement, for instance, companies are able to generate cost savings through purchasing such inputs as raw materials on behalf of their suppliers, which their suppliers’ economies of scale may not have otherwise allowed them to do at the same price. This has also facilitated greater control over pricing of components bought from their suppliers. By 2020, 30 per cent of the leading manufacturers questioned expected to improve their IT systems to manage their supply chain. Creating on-line business-tobusiness marketplaces is one way of reducing costs and managing disaggregated suppliers, and reverse auctions and e-sourcing are transforming the way in which contracts can be tendered and potential suppliers can compete for them. Also evident is a trend towards developing closer relationships with suppliers. Competition is no longer the sole driver behind efficiency and cost reductions. Best-in-class manufacturers leverage their purchasing power Costs can be hidden by suppliers, increasing the risk of price inflation for the manufacturer and decreasing their buying power. It also makes it difficult to monitor quality. Best-in-class manufacturers develop reliability chains through closer relationships with suppliers Manufacturer-supplier relationships have traditionally been characterised as adversarial. Cost-oriented competitive approaches to managing suppliers dominated business orthodoxy. Several exemplars of best-in-class supply chain management practices have rejected these old dogmas. Many leading manufacturers actively seek longterm relationships with suppliers that perform well on such metrics as quality and reliability. Driven partly by a ‘lean production’ philosophy, manufacturers wager that greater cost efficiencies can be derived from bilateral goal-setting, information sharing and working with suppliers. Seeking the lowest-cost producers is no longer the most important factor in selecting a supplier. The disruption caused by switching suppliers can be fatal, so preventing supply chain disruption has become a major driver of supplier selection processes and has increased collaboration between manufacturers and suppliers. Where customers are located across the globe, businesses face not only the physical challenges of maintaining relationships across such wide distances, but the cultural challenges as well. Manufacturers have long faced a tension between localisation to customers’ needs andglobal standardisation for productive efficiency. There is a fine balance to be determined by every business, and competitive disadvantage is the result of getting it wrong. Firms must consider how much their production needs to be globalised to achieve the necessary level of productive efficiency. Best-in-class manufacturers focus on customer experience, not product characteristics Increasingly sophisticated products from suppliers worldwide compete for market share among more knowledgeable customers. The approach of ‘selling to’ customers on the basis of product attributes (technical specification, reliability) is dying out. Products are usually purchased in order to yield a series of benefits over a period of time, so the best manufacturers design and offer their customers a package that delivers an experience of living with the product over the lifetime of its use. For example, customers typically contacted ABB when the equipment wasn’t working properly, or when they needed spare parts. These events might have been treated well, but they were still seen as on-off transactions. Now they are viewed as relationship-building opportunities in which ABB is able to differentiate itself markedly from its competitors. For best-in-class manufacturers’ customer relationships, location matters Competitive advantage in customer relationships requires the appropriate level of physical closeness, sometimes with regular discussions and working sessions with customers. So strategic decisions need to be made regarding the extent to which sales structures are centralised or decentralised, and the extent to which local operations are given autonomy of decision-making. So even in globalised value chains, successful manufacturers are decentralising their marketing relationships and allowing strong local autonomy. Retailers’ and distributors’ connections with customers canbe critical. The best manufacturers increasingly adopt collaborative approaches rather than simply competitive supplier relationships in order to give greater value to customers. There are benefits for both sides. As the complexity of manufactured products increases, greater training of retail or distributor staff is required, and }this demands longer-term collaborative arrangements with distributors. Deeper collaborative relationships give them the incentive to feed customer and market information back to their collaborating manufacturers. Customers can be a valuable source of innovative ideas across the value chain. Toyota asked consumers for design ideas on some models and then asked them to vote on them, giving consumers direct input into the design process and reducing design risk for Toyota. Courting customer feedback on products is common. Leading manufacturers now provide an opportunity for customer input in the decisionmakingprocess, enabling them to become partners in new product creation. While the era of the central laboratories is over and the era of dispersed research has begun, innovations need to be captured, managed and exploited. Much of Philips’ research is localised in its research labs around the world.The company is investing 40 million euros for R&D in 11 R&D centres in China. The challenge, however, is to ensure that this dispersed research excellence contributes to Philips’ global competitiveness. This means that innovations locally in China (for example, the value-segmented X-ray scanners developed in a Philips-Neusoft joint venture) need to be developed into a global opportunity for the group as a whole. This transformation requires strong network linkages within the group. The support is no longer just human and organisational. To cut the time and cost of developing IT systems, technology now enables them to be simulated before they are produced. This allows new systems to be experienced virtually before being prototyped, cutting the time-to-market, project costs and increasing adoption. A partnership between Capgemini and iRise, a world leader in visualisation software provision, for instance, has developed visual modelling technology that is being deployed across General Motors. Manufacturers still need wellcrafted value chains. Leading firms are still driving down their costs in the face of competitive pressure. They are still improving the speed of production and the quality and reliability of their products for customers who easily find competitive products worldwide. The quest for competitive advantage has not changed. The context within which firms seek these outcomes, however, has changed radically due to close interaction with, monitoring of and coordination alongside supply chain partners. In marketing, sales and service, we have abandoned the idea of central sales operations for entire multinational operations, but have not reverted to small, unconnected, locally responsive units doing their own things out of contact with anyone else. Courtesy: Capegemini
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