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News analysis: manufacturers must adapt or die

What do manufacturers have to do to achieve competitive advantage in a global marketplace?

The manufacturing sector has borne the brunt of recent technological advances, but according to an exhaustive report conducted by Oxford Economics for software giant PTC, and unveiled at PTC Live Global in Los Angeles, that change will intensify.If companies are to survive and flourish they will need to adapt. In previous revolutions the focus has been on operational efficiency, but in the present transformational landscape that is taken as granted and novel strategies need to be employed.

The ‘internet of things’, connectivity, big data, mobility, the cloud and social media are not new phenomena, but they are infiltrating the manufacturing world, necessitating rapid change. Manufacturing leader GE is talking about a new ‘Industrial Internet’ age arising from the convergence of intelligent machine networks with advanced analytics.

Oxford Economics questioned over 300 executives from 11 countries across a wide range of manufacturing industries.

“The study had three objectives,” Lou Celi, president of Oxford Economics America, says. “First it was to look at the pace of change that will affect the manufacturing landscape. Second, to look at how companies are transforming their businesses and changing their strategies to deal with these new realities. Finally, to measure the impact that these shifts could have on their businesses.”

The three prime challenges identified come as no surprise: economic realignment; technology; and talent. But it is the combination of these along with the pace of change that is causing companies concern.

“Clients talked about the rise in emerging markets, particularly China as top of their list of changes,” Celi explains. “Add to this economic uncertainty in the industrialised markets along with the rollercoaster ride of commodity prices and you have a volatile landscape.”

The list of challenges goes on. Complexity of supplier and partner relationships is a growing concern, especially when it comes to compliance, quality and risk.

High-profit firms were particularly worried about overseas competition and the threat from e-commerce. There were also qualms over increased regulation, not just because it is increasing but because companies are increasingly exposed to global differences.

Then there was the old chestnut of configuration, or customer optimisation. Fragmenting customer demand, the demand for greater variety among consumers, especially in emerging markets, is increasing complexity and cost.

Having recognised the challenges, it is how companies adapt to meet them that will determine their future prospects. Celi cites some examples. “One executive from Ingersoll Rand said to us ‘one of the biggest differentiators for a company is not keeping up with technology; that is how you lose control of your business’. That is why technology change and staying current is so important. Or as another respondent said: ‘we don’t just want to react to change, we want to create change’.”

The study showed that 68 per cent of companies will go through a significant business process transformation by 2015. One strategy that is rapidly gaining favour is dubbed ‘design anywhere, build anywhere, service anywhere’. Another trend that is coming of age is what the report calls ‘servitisation’. Where manufacturers used to sell products and then service and repair them as an aftermarket solution, many now view service as a distinct revenue generator in itself.

Rolls-Royce has long employed this strategy for aircraft engines under the TotalCare banner. In effect airline operators pay for the miles they fly. Other companies are looking at the same model in the domestic market, with one US-based washing machine manufacturer toying with charging users per wash rather than an up-front charge for the product.

Ingersoll Rand manufactures HVAC units and says it has built its brand on product excellence, but it is now adopting a new business model that offers its customers a comfortable climate as a service proposition. Diagnostic information is gathered from 10,000 pieces of remotely-managed HVAC equipment around the world and used to give advance warning when filters need to be changed, when oil or bearings are starting to wear, and when maintenance should be planned.

Utilising this data enables efficient service scheduling, but it could also be used to adjust the internal temperature of buildings in order to use the equipment more efficiently.

“It is not just about finding new revenue streams from service,” Celi says. “It is about rethinking your business through a service perspective.”

Smart, connected devices driven by advances in sensor technology and enhanced connectivity are changing the relationships between customer and manufacturer.

The value of building effective supply chains is well-recognised, but it is still a growing trend. The number of manufacturers leveraging their supply chain in new ways is expected to double by 2015. Like many trends this is driven by data: utilising the data from the customer end and driving it all the way down the supply chain to deliver advantage.

So-called smart products will grow to be over half the market of manufactured goods within the next three years. It is not just about offering better services to the customer, but also about obtaining better information from those products that can be fed back into product development and innovation.

The report makes compelling reading and the predictions sound a warning bell to those thinking of waiting for the market to develop. But Celi signs off with a disclaimer: “Back in 1984 at Business International we hired an analyst from Columbia University; he worked for me for one year. His name was Barack Obama; when he told me he was leaving I said ‘Barack, you’re making a huge career mistake’. That should tell you something about my forecasting abilities.”

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