Companies—and consultants—adjust their thinking for manufacturing's new global reality In a sector where consistency and standardization reign supreme, confusion sparked by a rapidly tilting playing field has thrown a wrench into North American manufacturers' game plans.
In other words, these are flush and exciting times for manufacturing consultants. "Manufacturing is a growth industry right now," says Deloitte Consulting Principal Mark Gardner, who leads the firm's automotive and industrial practice.
This growth increasingly consists of a new and innovative array of consulting engagements, which "in the old days" (i.e., more than three or four years ago) translated to various efficiency improvements. Although that cost-reduction focus continues, lean manufacturing, Six Sigma and other process-improvement projects have been joined by a wide world of new engagements.
Today, manufacturing consultants at Capgemini, Deloitte Consulting, BearingPoint, Bain & Company, Archstone Consulting and PA Consulting are staving off profit-plundering pirates, powwowing with sales and marketing on branding, digging into process improvement efforts among client's suppliers, marrying supply chain management capabilities to customer relationship management (CRM) processes and delving into talent management challenges.
Globalization, which has thrust nations of low-cost competitors into the mix, is primarily responsible for most of the pressures bearing down on North American manufacturers—and much of the confusion that inhibits responses to those pressures.
"Globalization is a big issue but you have to be careful in how you define it," notes Eric Schwalm, partner and head of Bain & Company's North American industrial goods and services practice. "By globalization, I don't mean [selling] products around the world. I mean regional products and sales organizations supplied from a global operating base."
Schwalm and other seasoned manufacturing consultants say their top priority is helping North American clients understand how to plan, compete and succeed in the newly global playing field that poses significant risks (major cost structure disadvantages) but also opportunities.
"If I'm Hasbro game factory in Massachusetts, why would I produce games there because it's so expensive compared to overseas locations?" asks Eric Johnson, professor of operations management at Dartmouth's Tuck School of Business. "Well, one reason is because they can exploit ways to capture last-minute changes in demand, particularly during the holiday run-up … The question many U.S. manufacturers face is: How do we exploit value of being local?"
The answer is flexibility, which requires significant change. And that's a good thing, for both manufacturing consultants and their clients. "I believe in the long run, U.S. manufacturers really have an advantage in the world," Schwalm asserts.
Unconventional Wisdom
Helping clients work through their pain starts with correcting misperceptions. There are a number of them, and they involve both external forces and internal problems. Consulting firms do much more than correct misinformation, but today this step seems especially valuable as manufacturers grapple to address a range of interconnected problems, nestled within each of the following bits of bumper-sticker clarifications.
The entire world is not flat. Yes, supply chains are flattening thanks to an explosion of new suppliers in low-cost countries, but not all markets have flattened. Many U.S. manufacturers remain regional in terms of their markets: they serve U.S. customers while trying to stave new competitors with lower cost structures and, as a result, lower prices. Schwalm estimates that only about 10 percent of U.S. manufacturers—the largest ones, such as General Electric, Hewlett Packard, Dell, Texas Instruments and Intel, to name a few, who also sell to overseas markets—have figured out how to serve regional customers from a highly flexible and mobile global supply chain.
The rest of the market is playing catch-up, and contending with growing complexity. "As partner networks become more global and more diffuse, managing it, controlling it and maintaining visibility into it becomes a critical challenge," says John Ferreira, a principal and founder of Archstone Consulting.
The consulting work under the "global manufacturing" heading ranges from figuring out where to manufacture and, in some case, which new markets to enter, to helping equip clients to do so.
"What do you make where and why?" asks PA Consulting Head of Manufacturing Martin Smith. "The answer has come a long way in the past 10 years. There used to be a sense that if you're not in China, you're a fool. … Now, it's much more complicated, because it's not just China. We do quite a lot of studies of where companies can locate manufacturing capabilities of various sorts." The analyses are complicated because they must evaluate a complex array of political conditions, available skills, salaries, logistics and other factors.
After addressing the what, where and why, manufacturers confront a more imposing question: how? "It's not so much a cost challenge as it is a capability challenge," Schwalm asserts. "That is a real fundamental challenge. To do this well, you
basically have to design a product and then characterize that product to the entire supply chain digitally."
Not surprisingly, several of the aforementioned electronics and high-tech manufactures have made the quickest transformation to an all-digital manufacturing organization. They can take a bill of materials and ship it electronically all over the world and then also manage their entire engineering processes, manufacturing processes and supplier network electronically.
"I tell people it's a good thing that there's an ocean between us and China," jokes Gary Baldwin, Capgemini's vice president of manufacturing. "I'm not sure how successful U.S. manufacturing would be without that water separating us." Baldwin's allusion to the logistical costs and risks associated with importing more goods from overseas supports Johnson's contention that U.S. manufacturers have a unique opportunity by dint of their proximity to end consumers.
Cost-cutting and top-line are not discrete. To leverage this opportunity, however, U.S. manufactures need a lot of help cutting costs and growing revenue. "Manufacturers must focus on growing the top line as well as managing their cost structures," says Gardner. "Manufacturers are finding themselves in the position of simultaneously investing in growth opportunities while carefully managing costs. This balancing act takes into account products, customers and regions, all of which have to be rationalized around profitable growth opportunities."
That's a tall challenge in light of new competition and all the cost-cutting that has taken place in the past decade. "Manufacturers have wrung costs out of supply operations for a long time," says Ferreira. "They've done a good job, but that need will never go away."
Yet, Ferreira and other manufacturing consultants also emphasize that one-off process-improvement and cost-reduction efforts no longer suffice—at least not in isolation. Change is required. Cost-reduction engagements have grown more expansive; they more frequently include applying Six Sigma methodologies to back-office processes, shared services reorganizations and outsourcing.
Schwalm uses the term "legacy costs" to describe the burden U.S. manufactures confront, and his definition expands well beyond the pension costs troubling the Big Three automakers. He's referring to the legacy cultures and infrastructures that linger from 1970s and 1980s-era business models.
"Given the volume and cost of manufacturing: They have an enormous overhead infrastructure they need to support, which includes operating costs and the costs of capital that they have to depreciate over time," he notes. "The challenge becomes: how can you reinvent the enterprise quickly?"
Supply chain management no longer means "cost-reduction" and "standardization." The supply chain represents an area ripe for reinvention. Consider the concerns that respondents to a recent Bearing Point-Industry Week survey on manufacturing challenges identified—the list zeroes in on sales and marketing issues: acquire new customers topped the list, followed by increase customer satisfaction, increase customer loyalty and develop new products and services.
This makes sense because top supply chain executives at leading manufacturers seem to be thinking more like their sales and marketing counterparts these days. Procter & Gamble's supply chain group, for example, has spent several years on efficiency improvement and partner-collaboration projects designed to generate gains that equate to one of the company's dozen-plus billion-dollar brands.
Customer-driven supply, says PA Consulting Head of Supply Chain Chris Poole, is about designing the supply chain from the point of sale backward. "You invest in supply chain to deliver excellence for the customer," he says. "That's a 180-degree turn from what supply chain management was five to 10 years ago. Then, it was about cost-reduction and simplification. Now, it's about investing in products and services differentiation and innovation to deliver a better deal for the [end] consumer."
The consulting projects that help clients achieve this goal include innovative approaches heavy on client-supplier collaboration. Ferreira reports that Archstone is beginning to help manufacturing clients use business intelligence (BI), the decision-support capabilities and applications that previously resided predominantly in the finance function, to "drive decision-making and reporting capabilities across the broad partner network to develop differentiated capabilities" that help drive top-line growth.
For its part, PA Consulting is borrowing techniques it has used with automakers and applying them to an aerospace client. "We're going back down the supply chain of a major blue-chip [company] and managing the competencies of their suppliers," Smith reports.
Brand and service matter. In a PA Consulting survey of 65 large global manufacturing companies, "brand strengthening" ranked a hair below efficiency improvements and higher on the CEO's agenda than priorities such as quality improvements, manufacturing advancements and technology improvements.
Brand management has long figured as a prominent issue in certain manufacturing industries (think cars), but other industries also are beginning to extend brand-strengthening activities deeper into their supply chain management activities. Phillips' simplicity brand campaign, for example, very much ties to how it designs, sources and assembles its consumer electronics products.
Service marks a newly emphasized component of manufactured products that help brand-building efforts. More manufacturers are grappling with the challenge of "wrapping and incorporating services into manufactured products and exploit the fact that they can somehow combine the two," says Tuck's Johnson. "The real trick for manufacturing consultants is to realize that any time you start combining services, it changes the manufacturing supply chain. It changes the product in many ways, but you can't treat them as separate things. The service and the product supply chains really need to become integrated in many ways."
That need for that integration helps explain why PA Consulting's supply chain practice is working more frequently with client-side sales and marketing executives and why BearingPoint's CRM practice has become more involved in manufacturing engagements. One of BearingPoint's clients now off-shores all of its manufacturing; the company's U.S. operations have transformed into service centers. "The work is about helping clients expand how they serve their customers because they know they need to do much more than deliver the product," notes Bill Baver, senior manager in Bearing Point's CRM practice.
Leaner is not always better, especially when it comes to talent. Talent concerns are simmering in most manufacturing industries and already are boiling over in a few. "All of the chemical engineers seem to be 55 to 65 [years old]," notes Smith. "And not enough are entering the workforce … It's a potentially massive demographic time bomb." The electronics industry also is hard hit. Other manufacturing industries have a bit more time to contend with growing talent shortfalls.
"In some [manufacturing industries], there is not as much talk about [talent] as there should be," notes Capgemini Vice President of Manufacturing Gary Baldwin. "But I believe the discussion is more and more relevant. We expect to do much more talent-management work this year and next year." That work consists of helping clients understand the strengths and weaknesses of their talent pool and then develop plans, such as outsourcing, related to acquiring, retaining and developing talent.
In addition to a growing need for specific industry experience, manufacturers also face a growing need for general managers with, for want of a better term, global chops. "Suppose a U.S.-based company wants to build an Asian sourcing network and an Asian indigenous market effort," Schwalm notes. "It's very difficult to find and then quickly transfer the right people from one place to another. It's also difficult to find people locally who can fulfill the GM role, which involves managing P&L."
T-Shaped Demand
Just like their clients, consulting firms seek a blend of industry and discipline expertise on their engagement teams. This desired blend contains a much richer variety of skills and experiences than in years past. Baldwin, a 20-year veteran, recalls a time, during the ERP implementation wave, when manufacturing practices perhaps favored capabilities like ERP, supply chain management and strategy, over industry expertise. "Now, we have to focus both on industry content and continue the discipline focus," he notes. "Clients want you to know how to do the work and, equally important, how to do the work in the industry in which they operate. It's not good enough to just be horizontal in nature. We have to be vertical as well."
So-called "T-shaped expertise," which is both broad and deep, is in demand now on engagements, agree other manufacturing practice leaders. Gardner has seen clients emphasize the importance of that mix to a much greater degree in the past 18 months.
He and others have also witnessed clients place greater emphasis on the importance of assigning the right internal talent to work side-by-side with consultants on the project team. "I find myself working in group sessions with many more client people from [client] operations around the world," says Archstone's Ferreira. In the past, manufacturing consultants could expect to work with a couple of client managers assigned from corporate headquarters and, perhaps, the division in which the project took place. Now, more consulting engagements are cutting across numerous divisions and corporate functions.
Time is Shrinking
As opportunities continue to increase, time seems to be growing shorter. The cycle time for a winning strategy, business or product line has shrunk dramatically. Not so long ago, helping a company move to a low-cost manufacturing base or create a highly advantageous product line offered a sizeable benefit for a good five to 10 years, says Schwalm. "Now, it seems like that may help for 18 months," he explains. "Companies are constantly having to reinvent product lines, their processes, the way they go to market, and who they are. The half-life of a strategic position has decreased dramatically."
While this trend may cause significant scrambling and suffering over the short-term, Schwalm believes this work places U.S. manufacturers in a refreshingly advantageous position, which explains his optimistic long-term forecast for the sector. "As painful as it is," he says, "the ability to change and adapt is much greater in the U.S. manufacturing and business community than it is in other areas in the world."
| Extracting green from gray markets Join the manufacturing practice. See the world. Battle pirates? |
| When Archstone Consulting principal and founder John Ferreira entered the ranks of manufacturing consultants 24 years ago, he could not have imagined that he would one day set sail on the seven seas to work a single project for one client. Today, in his work with one of the largest high-tech manufacturers, he's done just that. And Ferreira's work as Archstone's industrial and supply chain practice leader has exposed him to a costly yet under-exposed scourge of the global supply chain: piracy.
Gray market theft occurs when legitimate products, like software, toner cartridges or almost any other high-margin product, enter a market via an unauthorized seller at a huge price discount. The unauthorized sale frequently originates with a supply chain partner who does an "end-around" the established channels and "leaks" the product to a market. The gray market, for example, explains why there are two price tags—a "U.S." tag and an "imported" tag (for 20 percent to 40 percent less)—dangling from high-end camera lenses in some Manhattan camera stores: the manufacturer of the lenses was forced to support the retailer's discounted price (and the rebate on the "U.S." price) because the retailer's competitors are selling the same lenses as the discounted price thanks to gray-market suppliers. "Few companies aggressively attack this area," Ferreira reports. They should, however: Two years ago, U.S. manufacturers lost an estimated $250 billion to piracy, a large component of which involved gray market transactions, according to the U.S. Chamber of Commerce. That figure also helps explain why Ferreira and his colleagues are sharing with clients techniques for strengthening supply chain controls and processes to plug those leaks and recoup lost revenue and profits. —E.K. |
Piracy takes several forms, including outright theft, usually perpetrated by large syndicated crime rings, counterfeit goods and the gray market. The latter form of piracy is "bigger than you think," Ferreira asserts. "Manufacturers are losing billions of dollars in this area, and it's a direct result of partner networks growing more extensive and complex to manage."© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.