The Juice Flows Again

Survey shows IT spending will expand this year as prices fall, and companies dust off shelved plans.

Editor's Note: Results from the IW/MPI Census of Manufacturers will appear as a five-part series in the January 2004 through May 2004 issues of IndustryWeek. With four out of five manufacturing plants expecting increased revenues this year, it's no wonder that the IW/MPI Census of Manufacturers reveals a relatively positive outlook for new investment in information technology. While half of all manufacturers in the survey held IT spending flat or slightly reduced investment in technology in 2003, some 62% say they will boost investment in software and computers in 2004. More than one in five manufacturers are bullish enough on the promise of technology-induced gains in productivity and profitability that they plan to boost IT spending by 6% or more. That kind of spending increase by any large number of companies hasn't been seen since before the current economic downturn began. The shift, observers say, might well be a harbinger of more expanded use of IT by manufacturing in the near future. Indeed, business investment in equipment and technology combined grew 10% in the final quarter of 2003, according to preliminary GDP reports. "Technology costs are dropping like a rock," says Buzz Adams, president of Peak Value Consulting, a Pasadena, Calif., consulting firm specializing in process improvement. "The payback for some of these systems is very dramatic, and companies are getting giant pops in productivity." It's that reduction in price of some IT systems -- hardware and software -- that has companies finally starting to warm up to the idea of buying technology again. "The price-performance of IT solutions has increased dramatically in recent years," observes Bill Davidson, president of Mesa Research, a Redondo Beach, Calif., consulting firm. Many manufacturers, in fact, had developed a pent-up appetite for new systems. In 2003, for instance, 40% of manufacturers said they had frozen their IT budgets. Another 9% had gone further, trimming spending in line with cost-reduction goals. This year, though, things will be a bit different, as only about one in three (32%) anticipate zero growth in IT spending, and just 6.5% plan to reduce spending. Despite the fiscal constraints of recent years that affected nearly every manufacturer, most companies never threw out their plans to do more with new technology. They just put them aside for a sunnier day. "A lot of companies that had been developing long-term technology plans for the last couple of years now are aggressively starting to implement them," says Davidson, author of the just-released book, "Breakthrough" (2003, John Wiley & Sons), which is based on the experiences of 70 high-performing companies that he tracked for a decade. "At the same time, prices of the technology they're looking at have come down." Some manufacturers, in fact, find they now can get major bargains on software and its installation. Davidson cites one major software system that a couple of years ago would have cost $55 million and now is being purchased and installed by a large consumer packaged goods manufacturer for less than $20 million. "The value propositions for new technology are very compelling," he says. "Many manufacturers have a pipeline of projects they would like to get to, and the logjam is starting to break now, and they want to get some of these projects done." Manufacturers participating in the survey reported profitability gains from both newer applications and older, more established ones commonly used by their customers and suppliers as well. These latter systems include electronic data interchange and computer-aided design (CAD) software. Familiarity with, and widespread acceptance of a technology often enhances its usefulness and payoff to the purchaser. With the learning curve gone, employees are up to speed with the way the technology works and have had time to work the kinks out of associated processes. "These are technologies that people are getting more competent with, and so they can still drive a lot of productivity, and manufacturers can get an awful lot of benefit from them," Adams points out. When asked about profitability gains from various kinds of software applications and other technologies, manufacturers with CAD systems in use generally found them beneficial. Only 65 plants (11%) said they had no improvement from computer-based design systems, while 215 plants (36%) said they obtained major improvement in profitability via the use of design software. Surprisingly, though, some newer technologies, such as enterprise resource planning systems, which have been criticized far and wide for costing too much and taking far too long to install and get up and running, nonetheless are paying off for manufacturers. Because this year's Census sample contained many smaller manufacturing plants, only 245 out of 828 plants had made the often million-dollar-plus investment to install ERP systems and get them up and running. Of those that did, though, 205 plants, or 84%, reported some profitability gains as a result. Manufacturers are finding customer relationship management (CRM) and product lifecycle management (PLM) software applications to be extremely beneficial to profitability. And judging from the numbers, CRM is paying off big time for manufacturers that made the investment in the technology. Although only 272 plants out of a total of 793 responding were using CRM, of those that did, some 79% said they were getting a bottom-line benefit. Likewise, while only 88 plants reported using (PLM) software, a relatively new application, of them, a total of 65 plants (74%) said they had seen a boost in profits as a result. That also was the case with online purchasing systems such as reverse auctions. Manufacturers using these systems to cut purchasing costs found them profitable, with 74% reporting some or major profitability gains as a result. Just as telling, of those plants not using online purchasing technology, 25% plan to implement these Internet-based selling tools in the near future. Clearly, this year's Census results suggest that manufacturing is poised to further embrace software, computers, the Internet and automation in order to wring further gains in productivity and profits from their operations. And with technology prices down, manufacturers couldn't find a better time to make those investments. As author-consultant Davidson puts it, "It's like being at the bottom of real estate market -- it's a wonderful time to be a buyer of IT systems and solutions." Manufacturers Held IT Spending In 2003

Decreased IT Spending 11% Or More 3.0%
Decreased IT Spending 6%-10% 2.9%
Decreased IT Spending 1%-5% 3.3%
No Change In IT Spending 40.2%
Increased IT Spending 1%-5% 34.1%
Increased IT Spending 6%-10% 11.4%
Increased IT Spending 11% or More 5.0%
But More Will Increase Spending In 2004
Will Decrease IT Spending 11% Or More 1.8%
Will Decrease IT Spending 6%-10% 1.7%
Will Decrease IT Spending 1%-5% 3.0%
No Change In IT Spending 32.1%
Will Increase IT Spending 1%-5% 39.9%
Will Increase IT Spending 6%-10% 15.9%
Will Increase IT Spending 11% or More 5.6%
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For a summary of the complete results or industry-specific data from the 2003 IW/MPI Census of Manufacturers, contact the Manufacturing Performance Institute, (800) 603-2272, or [email protected].
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