Mastering Disruptive Change in Manufacturing. Buckle Up: Six Driving Forces in Manufacturing to Take On Now

Transcription

1 Mastering Disruptive Change in Manufacturing Buckle Up: Six Driving Forces in Manufacturing to Take On Now 1

2 As the latest waves of change gather momentum, 21st-century manufacturers face decisions that could create opportunities or competitive challenges as significant as the idea of interchangeable parts or Toyota s improvements on Henry Ford s assembly line. Today, the potential impact of new technologies such as 3-D printing, the risks inherent in global supply chains, the exponential growth of data, and the changing socioeconomic demographics are just a few of the new disruptors. As a result, the future of manufacturing is again a hot topic in public debate and on boardroom agendas. Companies are looking for a unique competitive edge or ways to respond to the unexpected. Manufacturers that can accurately anticipate how these trends will affect their businesses, such as the future needs and size of factories, the potential role of big data in improving productivity, workforce implications, and the level of automation to employ, can turn challenges into profitable opportunities. Among the questions that need answers are the following: What are the longer-term challenges that impact operations? How will these challenges affect the manufacturing setup and competitive environment? What solutions or best practices will address these challenges? Compounding the current disruptive powers is the convergence of trends from multiple directions. To address them successfully requires being able to look in two directions at once. In this case, it requires considering both the familiar areas that constantly influence the business and the less-anticipated areas that can nonetheless profoundly affect a company. Initially, it helps to think in terms of six core areas within which the trends appear (see figure 1). Figure 1 Six core areas in manufacturing: familiar areas and blind spots Blind spots Trends Familiar areas Globalization vs. regionalization Power shift from West to East Realigned global supply chain New manufacturing technologies New product technologies Technological advances New supply chain models End-to-end optimization New collaboration models Future of manufacturing Going beyond lean Big data analytics for productivity New productivity levers Environmental changes Elevated volatility and risk Depleted natural resources Shifting labor relations War for talent Workforce dynamics Source: A.T. Kearney analysis 1

3 Three areas are likely already on your daily agenda: Technological advances New productivity levers Workforce dynamics Three others are likely on the periphery: Globalization versus regionalization or localization New supply chain models Environmental changes Based on our work in these six core areas and on insights gathered from our Global Excellence in Operations Factory of the Year competition, A.T. Kearney has identified the driving forces or trends we expect to be among the most influential to manufacturers. Manufacturers that accurately anticipate how these trends will affect their businesses can turn challenges into profitable opportunities. In this first in a series of papers on disruptive change in manufacturing, we discuss three driving forces occurring in familiar areas: new manufacturing technologies, going beyond lean, and shifting labor relations. These are followed by an examination of driving forces that could be the source of looming blind spots: the power shift from West to East, end-to-end optimization, and elevated volatility and risk. 1 Three Driving Forces in Familiar Areas 1. New manufacturing technologies will reshape the traditional factory model New manufacturing technologies are emerging faster than ever. Some of them, such as collaborative robots and 3-D printing, are already disrupting the long-established environment on the factory floor and have the potential to fundamentally transform or even replace conventional manufacturing operations. 2 For many years, security fences have segregated capital-intensive robots from human workers, which has limited the potential for automation in a wider range of tasks. Currently, automation experts around the globe are working toward the goal of bringing the robot out of the cage to fully exploit the potential of an improved collaboration between robots and operators. 3 Future 1 Six more trends will be discussed in future papers in this series. 2 3-D printing is also known as additive manufacturing. 3 The Economist Technology Quarterly, 7 September

4 human-robot collaborations will combine human agility and intelligence to solve problems with the durability and precision of robots at a lower cost. Also supported by easy and quick programming, such as motion or voice control, this new collaboration may lead to a marked change in productivity and profoundly affect the traditional factory model overall. Manufacturing is already headed in this direction. Automobile makers BMW and Daimler are about to introduce collaborative robots on a large scale to replace the final assembly activities currently completed by human operators. Also making inroads is 3-D printing: The global market for this technology is developing with 20 percent growth year-on-year and is estimated to reach between $25 billion and $50 billion by Even traditional manufacturers are realizing the opportunities offered by 3-D printing. GE envisions that someday, people will print entire aircraft engines. Other industry giants such as Samsung and Canon have already begun to use 3-D printing technologies. The potential benefits, whether from reduced manufacturing costs, improved lead times, or better quality, can be tremendous. And the ability to manufacture additive, individually customized products at a previously unachievable scale, cost, and lead time could open up whole new markets. Already today, 3-D manufacturing has in some cases surpassed conventional manufacturing for small lot sizes. For example, the Worcester Polytechnic Institute used this new technology to produce a medical implant at nearly 90 percent lower cost and seven times faster. 5 The global market for 3-D printing is growing rapidly and is estimated to reach between $25 billion and $50 billion by With manufacturing technology heading in dramatic new directions, keeping pace with it is more important than ever. Success requires actively scanning the new technology frontier regularly to position your company to capitalize on opportunities when they arise. Recognizing these openings as they occur takes an understanding of the new technologies advantages and risks. And positioning operations for quick adoption of the right technologies begins with a rigorous assessment of the factories capabilities to take advantage of the technologies. Finally, it is imperative to put in place a clear road map for testing and adopting the technologies so you are ready to move as the opportunities and needs arise. 2. Going beyond lean is necessary to win the productivity game Since the early days of the Toyota Production System and the buzz generated in 1990 by the book The Machine That Changed the World, thousands of companies have launched initiatives to eliminate waste in their factories, and more recently in their back office functions. Lean has long provided the philosophy and the toolset to achieve the required competitive edge in the productivity game, but it didn t work for every company. Successful lean companies have achieved year-on-year productivity improvements of as much as 10 percent, while others have struggled just to compensate for moderate wage inflation. With lean being ubiquitous, the question is: What comes next? 4 Wohlers Associates 2013; A.T. Kearney s Global Business Policy Council 5 3

5 The answer is two-fold. First, after lean comes more lean, since many companies are still applying lean to only a portion of their manufacturing operations, thereby leaving significant opportunity on the table. Second, those that have rolled out lean broadly and widely will look beyond their lean production and management systems to systematically expand their scope beyond manufacturing for example, going after both input factors and supporting functions (see figure 2). Paper manufacturer Sappi, for example, has watched as factor costs for natural resources and energy starting to outweigh its labor costs. The company will benefit from redefining its manufacturing approach to focus more on resource efficiency. Regarding functional scope, it is clear that multiple improvement opportunities cannot be addressed solely on the factory floor. Rather, they have to reach into adjacent value chain functions, particularly those in production support and supply chain management. The company also has to reexamine the extent of cooperation between organizational silos (also referred to as interoperability) and collaborate more with suppliers, clients, and other stakeholders to take the next step toward improved productivity. In addition, consumer electronics companies such as Sony or Philips face the challenge of reducing their time-to-market in order to outperform the competition. One way to do this is by maximizing operational flexibility by leveraging third parties and minimizing their own assets, which frees them to focus on controlling the supply chain. By becoming virtually vertical, companies get beyond their own limitations. Efficient product individualization is another factor in improved productivity. Leaders in the automotive and durable consumer goods industries are addressing it with a focus on flexibility. Volkswagen, for example, has used modular product platforms to foster product variety in large-scale production. Manufacturers are also introducing modular building blocks for greater Figure 2 Move beyond traditional lean manufacturing to focus on input factors and functions Operations excellence strategy Traditional lean focus Interoperability Flexibility and modularization Resources Lean Labor Assets Input factors Going beyond lean Direct manufacturing Fully capturing the impact of lean Indirect manufacturing Functions Source: A.T. Kearney analysis 4

6 cost efficiency. The modules enable factories to exchange product families to maximize facility usage and regain productivity advantages. Still, the scope for modularization extends far beyond the production line (for example, to organizational structures across factories). So when it comes to finding the next productivity frontier in manufacturing operations, expand your horizons by revisiting the effectiveness and scope of existing lean initiatives and work together with both internal functions and other players in your company s ecosystem to find additional joint productivity opportunities. 3. Shifting labor relations will increase the number of managed relationships Despite increasing automation, people remain among the most important resources to any manufacturing operation. That s reason enough to shift interactions with workers higher up on the priority list. It wasn t so long ago that unions were losing members and seemed to be losing influence in companies and in politics. In Great Britain, for example, union density decreased sharply from 50 percent in 1980 to less than 27 percent in Yet today, almost everywhere in the world, workforces have established increasing numbers of networks and groups representing their interests to counterbalance this past trend. In previously non-unionized countries, such as China, organized labor s political and operational influence is growing. Even in Western economies, specialist unions that represent small groups are on the rise and are successfully exerting their influence. For example, Lufthansa has faced strikes from many interest groups during the last several years, including those representing their ground personnel, crew, airport security staff, and air traffic control personnel. Rather than having to interact solely with large unions, a new, more fragmented landscape is emerging. When looking for the next productivity frontier, expand your horizons by revisiting the effectiveness and scope of existing lean initiatives. This growing labor relations trend is already challenging the manufacturing world. Low-cost locations suddenly require an increased focus on the human resource, while at home, the stakeholder landscape of labor relations is expanding. On top of this, international union networks are emerging, and the shortage of skilled labor worldwide is forcing manufacturing executives to rethink how they approach labor relations. Being strategically and tactically ready for this new situation is vital. A fresh assessment of possible exposure to these issues can help identify new vulnerabilities and provide a benchmark for actively monitoring future changes in both domestic and international locations. Based on what you find, decisions are made about developing mitigation strategies and contingency plans to shape labor relations and, ideally, to move toward a better model of cooperation with your workers and workforce representatives that fosters a true entrepreneurial spirit. 6 Chris Wright, What role for trade unions in future workplace relations?, Acas, September

7 Identifying Blind Spots on the Periphery In the latter half of our examination of what's shaping the manufacturing landscape, we look at three driving forces that may pose worrisome blind spots if competitors recognize their importance before you do. 1. Heed the power shift from West to East The transformation of the Chinese manufacturing industry is another driving force that should be on every manufacturing executive s agenda, and not only those with factories in China. Many leading Western companies have interdependencies with China, either as a sales market, a location for manufacturing sites, or as a source for suppliers. In addition, Chinese companies international M&A activities have increased noticeably. China s prominence means that rumbles felt within its borders are felt worldwide. China is an important provider of manufactured goods and even more a consumer of capital equipment and consumer products. Due to rising labor rates, targeted to increase by 10 to 20 percent annually in the coming years, the Middle Kingdom is losing its status as the number one low-cost country in the public debate. (The cost advantage to Western countries still remains significant, however.) It would also benefit from investing in vocational education and the acquisition of skills among its putative future human resources. High turnover rates continue to get in the way of implementing efficient processes, too. It is vital to fully understand the changes and risks in your supply chain. Yet, the pace at which China has developed during the past 10 years makes it likely that it will continue to advance rapidly. A shift from low technology and low-productivity manufacturing to high technology and high productivity is already happening, although at a fairly moderate pace, as many Chinese companies adopt automation to compensate for higher labor costs. The best Chinese factories employ Japanese or German lean experts to reach the next levels of productivity. In fact, we expect rising labor costs in China to make Chinese manufacturing in the midterm more competitive. We see this happening particularly in the original device manufacturer segment focused on consumer electronics and represented by companies such as Wistron, Compal, and Foxconn, whose manufacturing footprints extend across China. It is noteworthy that the next source of Chinese productivity gains is within the multilayered and oversized overhead of the management and engineering areas. A closer look at front-runners such as automotive suppliers indicates that this trend is already under way. Labor-intensive, low-technology production is moving to new low-cost countries such as Vietnam and Bangladesh. Meanwhile, a flow of high-end production from Western countries to China, spurred mainly by a favorable productivity and labor-cost ratio, local market importance, and duty-free delivery, will compensate for this movement. Indeed, the power shift from West to East calls for action now, beginning with a review of your existing footprint strategy and the productivity levels that will be required to respond to influences from the East. 6

8 2. Achieve true end-to-end optimization, from raw materials to recycling Today, the trend is to focus on core competencies, with manufacturers transferring numerous functions to suppliers and other third parties. The extent of vertical integration and the importance of manufacturing often decrease in the process. In Germany, for example, vertical integration in the automotive industry, specifically with original equipment manufacturers, has fallen to about 20 percent of manufacturers. 7 At the same time, a company s influence over its own manufacturing cost structure has waned. To realize full manufacturing potential requires adopting a true end-to-end perspective that expands optimization, from raw materials suppliers to end consumers and even recycling. Best-practice companies are already capitalizing on their manufacturing know-how to boost both internal performance and that of suppliers along multiple tiers. This trend has found firm footing in the automotive industry with upstream and high-touch supplier fitness programs. Even market-oriented companies such as Mondelēz, Bosch, and Siemens Home Appliances have launched joint initiatives and expect high payback in terms of cost competitiveness, more innovation, and improved delivery performance and quality. In addition, new collaborative opportunities are emerging, from joint factories and other assets to formal and informal best practice exchanges. We should see increased downstream optimization as well, driven by joint manufacturing forecasting and planning, value-added service specialists, and capitalizing on customer intimacy to encourage recycling of materials. The key here is to take advantage of your true end-to-end optimization opportunities to get back into the driver s seat and achieve a full value-add process. Undoubtedly, the importance of manufacturing in this process will rise again as a consequence. 3. Know the elevated risk and volatility that will challenge global supply chains Supply chains have developed rapidly in the past decades as they have become more global and efficient. At the same time, they are more exposed to different and higher risk levels. Natural disasters and economic disruptions have caused immense financial and reputational damage to global supply chains. Examples include the tsunami and nuclear catastrophe in Japan, economic uncertainty in the eurozone, and volatile and politically uncertain African markets. Clearly, mitigating these risks is a crucial role for manufacturing executives to safeguard material flows via upstream elements in the supply chain. Integrating manufacturing with risk management for the entire corporate supply chain is a strong first step. Winners in this new environment of elevated risks and volatility will be those companies that understand the risk drivers and build in resilience and effective response mechanisms. Among the first movers addressing this strategic trend is Toyota, whose misfortunes as a result of multiple catastrophic events in recent years is widely known. Thanks to a risk management plan it put in place, even though the company cannot predict the nature of future supply chain disruptions, it now ensures that it is prepared and organized in a way that will allow it to recover within two weeks of any disaster. It is vital to fully understand the changes and risks in your supply chain, not only as they could occur within your industry, but also as they could affect the industries of your suppliers and customers. Constant monitoring of risks and making corrections after noting early warning signs is an excellent first measure. Also, it is wise to develop and align mitigation action plans across functions as well. 7 BDI (Federation of German Industry) 7

9 Leading Into the Future: Prepare for Rapid Change It is true that the world often takes manufacturing for granted. But when disruptive trends change manufacturing in fundamental ways, all eyes turn to those capable of navigating the rapid shifts with insightful and responsive strategies. Adopting an approach that isolates and evaluates the most relevant trends within the six core areas of your manufacturing business is essential for formulating strategies that deliver both an immediate impact and a longer-term advantage. Watch for more papers in this series as we examine the disruptive trends affecting manufacturing. Authors Bernd Schmidt, partner, Düsseldorf Patrick Van den Bossche, partner, Washington, D.C. patrick.van.den.bossche@atkearney.com Marc Lakner, partner, Berlin marc.lakner@atkearney.com The authors wish to thank the members of the firm s future of manufacturing team for their valuable contributions to this paper. 8

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