How manufacturers can prepare for post-recession profitability

Paul Boughton
As yet there is no firm consensus as to the nature of the United Kingdom economic recovery. The three most likely scenarios are that the recovery will follow the form associated with a 'simple' recession, that there will be a 'double-dip' recession, or that there will be a 'zombie' economy in which half-alive, half-dead banks, governments, consumers and companies struggle to function in the new world. Against this background, however, it has to be remembered that China and India have lost little of their momentum in becoming dominant manufacturing locations.

In trying to decide on the best action to take, corporate board members are faced with apparently conflicting requirements. Should the chief finance officer preserve cash and reduce working capital, or invest in future winners? The chief technology office may want to make research and development (R&D) leaner and reduce time to market, yet also ensure that high-growth products and services are developed. As for the supply chain, the need to minimise costs and working capital may seem at odds with the need to create responsive, customer-focused supply chains.

David Hatrick, a technology and innovation consultant with PA Consulting Group in Cambridge, UK, recommends that manufacturing companies adopt a three-pronged strategy in order that they can emerge from the downturn as winners. His strategy is: create space; create agility; and create the future.

Assuming that simple cost-reduction measures have already been implemented, it is necessary to find more radical ways to maintain momentum in cost-saving programmes.

Creating space to yield savings

Hatrick says that creating space can yield savings in two ways: "In our experience with clients across a number of sectors, optimising the product cost through a combination of improved design (eg embedding modularity or platform designs across a product range) and focusing on the supply chain (eg through better procurement practices and supply chain design) can deliver savings of between 10 and 20 per cent. Secondly, reducing complexity across the product range, with reductions in SKUs (stock keeping units) and raw materials/components, (eg by simplifying raw materials strategies) can have a significant impact on direct costs as well as making savings in support functions such as procurement and R&D." It is relatively straightforward to identify potential savings, but the reality of implementation means that typically two-thirds of this forecast saving will achieved.

Various tools and techniques can be applied in the product cost optimisation process, which has a broader scope than the value engineering exercises that were popular in the past. In PA's experience, three main areas of focus consistently deliver significant benefits: Best Practice Costing identifies the route to optimising manufacturing processes, materials, machine utilisation, manpower and overheads; a Best Value Stream Analysis determines the most cost-effective production locations and supply chain design; and finally a Best Practice Product Exercise involves looking at product redesign for cost and benchmarking against competitive products.

Complexity is a cost generator

An additional cost generator in many manufacturing businesses is complexity, where the product range expands over time to meet the needs of customers without enough attention being paid to cost and profitability implications. Some degree of complexity in manufacturing businesses is inevitable, but it can easily run out of control, resulting in ever-increasing numbers of non-profit-generating products hitting the market. Hatrick says: "Businesses need to manage complexity and decide what level of complexity is appropriate. They need to understand the competitive position of product, the key features for which customers are willing to pay, and understand the true cost to serve the market. Complexity can occur on the supply side, with many companies using multiple suppliers and specifications of single raw materials or components when this is not strictly necessary. By limiting the specifications and number of suppliers, manufacturers can make significant savings through more effective procurement. On the demand side, if a company is asked to supply a high-volume product in a specific size or format just for one customer, you have to ask whether the cost of modifying product designs, tooling, etc to serve that customer is really going to generate profit for the business overall?"

In some cases the answer is yes, in which case it is right to allow the increase in complexity. But if the answer is no, then companies should decline to meet that unprofitable demand. "These can be hard decisions to make, especially if a customer is asking for that product - but in the long run the business will not succeed without proper control of complexity," states Hatrick..

Product cost optimisation and supply chain innovation often benefit from the use of consultants. Existing project teams can be too closely involved to be able to challenge the assumptions, ask the 'dumb' questions, and take a fresh look at the design of the product (or portfolio of products) and the supply chain. Consultants can also bring alternative ideas from outside the industry, or suggest the use of new technologies of which the client's designers are not yet aware. If need be, consultants can also undertake R&D and/or design work, enabling products or processes to be brought on stream faster than if they were left to in-house teams (Fig. 1).

Agility needs to be created both in the supply chain and in the way the manufacturer innovates. "Companies with CDS (customer-driven supply) at the heart of their supply chain strategy design their supply chain to win the customer at the point of use or the point of sale; the upstream supply chain is designed back from that point," explains Hatrick. "A recent survey conducted by PA confirmed that a CDS approach delivers better overall supply chain performance: revenue improves by 10 per cent and profit margins increase by five to seven per cent."

One of the key factors in creating an agile innovation system is the establishment of a rigorously managed process by which projects can be assessed - with a view to focusing on the value-creating projects and dropping those that will not contribute to the success of the business in the long term. Innovation projects that deliver small, low-value incremental changes tend not to contribute to the long-term survival of the business and remove focus from the more fruitful but potentially longer-term innovations. Manufacturing businesses face a continual struggle to balance these short-term, incremental projects that keep current customers happy, with those longer-term big innovations that everybody agrees are key to the future of the business.

But by implementing an effective portfolio management system and decision-making process, companies are more likely to succeed by creating the right balance of resources for strategic growth opportunities and the incremental projects required to meet short term customer demands. This innovation portfolio management needs to involve cross-functional decision makers (such as R&D, marketing, supply chain and finance) working with transparent project portfolios - not hidden or pet projects.

Involving the whole organisation in the front end of the innovation process can also be an excellent way of increasing the speed and volume of new ideas and concepts being created, and providing the agility to respond to new market needs as they appear - without having to increase the budget for R&D. Using new internet- or intranet-based tools can allow people from across the business (finance, sales, human resources and procurement, for example) to contribute by submitting new ideas to the central innovation teams, and they can also be used to give feedback and help to build on new ideas as they develop. Hatrick comments: "Managers need to be aware that recent graduates are familiar and comfortable with social networking such as Facebook and Twitter, so they make good use of intranets and in-house forums. Ideas develop much faster this way than with the traditional method of talking to colleagues at the coffee machine!"

Similarly, manufacturing companies should take advantage of information and communications technologies to enable truly global teams to be formed.

Creating the future

In order to create a profitable future, manufacturing businesses need to focus on identifying and developing strategic growth platforms, and boosting the productivity of their innovation activities. To develop future growth platforms, it is vital to understand the new realities for customers and consumers. Hatrick says that companies need to decide in which direction they want to go: "Where will future growth come from for European manufacturing companies? Growth is predicted to be flat in the European and North American automotive and consumer product markets, so businesses in these industries are developing growth strategies that place a significant emphasis on the BRIC economies (Brazil, Russia, India and China) and developing their product ranges to meet the differing needs of consumers in those geographies. This drives the need to understand the requirements of customers and consumers in different geographies in far more detail than many European companies currently do."


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