View From On High

IndustryWeek's survey of upper-level manufacturing executives shows what makes top-performing companies tick.

Part of the aftersale-support credo at ABB Automation Inc., Lewisburg, W. Va., is to service assemblies containing competitor's products. "Doing things the customer doesn't expect is what gives us our competitive edge," says John Barnes, vice president and general manager, whose unit fabricates test equipment for the petrochemical industry. "Customer service also means responding quickly, in a matter of hours, not days, to get answers to difficult questions. In many instances we don't compete so much on price as on the quality and service we provide to the customer." What does give a manufacturing company its competitive advantage? What are the significant obstacles managers must overcome to spur growth? How can manufacturers improve the performance of their supply chains? How have quality problems impacted company fortunes over the last year? These are a few of the questions addressed in IndustryWeek's 2001 Census of Manufacturers survey of manufacturing leadership. Conducted by PwC Consulting in June, the telephone survey quizzed 313 corporate-level manufacturing executives. The results from this survey, supported by follow-up interviews, give insight into management challenges all manufacturing executives can relate to, as well as best practices deployed by industry-leading companies. Living On The Edge Executives were widely split on what creates the competitive edge for their companies, proving there is no set formula for success in manufacturing. About one-third of respondents cited new-product development as their long suit; a few more such as ABB Automation mentioned customer service; just over one-fourth cited operational excellence. Application of a formal product-development process such as a stage-gate system, as well as collaboration with customers and suppliers, were easily the most important factors for manufacturers who said product innovation is their greatest competitive weapon. For instance, new products -- those introduced in the last five years -- represent 60% of the annual revenues at Stryker Corp., Kalamazoo, Mich., a manufacturer of medical devices including tools for orthopedic surgeons. New-product contribution is managed to that level to optimize sales-force efficiency, according to John Saunders, vice president, global operations for the instrument division. "It takes two to three years for new-product sales to accelerate, and about five years to plateau out. If we fall into the low-50% range we get a lot of noise from salespeople on 'where are the new products.' If we get much above 60% the sales force has too many things to learn, and they [lose focus]." Most ideas for Stryker's new products come from the sales and marketing force who spend 70% of their time with doctors and in hospitals, and most development takes place in collaboration with medical specialists. Like most companies, at Stryker "there are always more ideas out there than we can act on," says Saunders. Focus on new-product efforts is provided by an executive committee that does a quarterly "pipeline review" of new-product ideas. Once these are selected, Stryker uses a stage-gate review system to move projects through their life cycle from idea to product launch. "The system of formal reviews at each phase helps keep our priorities clear and manage the manpower needed to support a project." Companies noting operational excellence as their competitive edge gave the nod to manufacturing excellence, talented employees, and commitment to quality, in that order, for their success. Nearly half of those surveyed cited lean manufacturing as their overall manufacturing strategy. Oddly, management leadership and technology were given little credit for operational excellence. Key Element Of Operational Excellence

%
Manufacturing execution 35
Talented employees 27
Commitment to quality 24
Management leadership 10
Technology 4
Size and quality are the roots of operational excellence at Lake Region Manufacturing Co., Chaska, Minn., fabricators of medical guide wires for procedures such as angioplasty. "Though we are not the lowest-price supplier, we are considered the highest-quality producers in the industry," says Charles Camp, vice president, global operations. "Customers know their own costs of quality are lower when they work with us, so that gives us a competitive edge. Another edge is, being the world's largest supplier, companies know we have a lot of expertise, so they naturally come to us when they need custom items." One in five executives cited flexibility as their manufacturing strategy, with many of those crediting talented employees for this competitive advantage. This combination is showcased at Electrolux LLC, Bristol, Va., makers of top-end floor-care equipment from shampooers to central vacuum units. Once vertically integrated, the company has recently outsourced most of its component manufacturing and reorganized its assembly process from an automated, inflexible, conveyor-based system to a simplified manual system designed for short runs and quick changeovers. "Before we would run an SKU for several days," says James McCain, COO. "By the end of the year we will run an SKU for two hours." Outsourcing and new assembly processes have cut standard costs by 20% and reduced finished-goods inventory by 50%. McCain credits great teams with the ability to execute in the new setup. "We now have 500 people assembling vacuum cleaners and there is not a supervisor in the house," he beams. He credits ISO 9000, and pending ISO 9000:2000 certification, as providing the basis for training programs that support this unusual environment. The Demons Within Unfortunately, business functions operating within their own silos continue to plague manufacturing companies. In fact, organizational barriers were cited by one-third of executives polled as the biggest internal obstacle to growth at their companies. Internal Obstacles To Growth
%
Organizational barriers 33
Worker skill level 19
Inadequate IT systems 17
Don't know 11
Misaligned incentives 10
Lack of management leadership 9
At a recent round-table discussion featuring representatives from IndustryWeek's 2000 Best Plants winners, William Campbell, Alenia Marconi Systems Operations Div.'s group operations director, expressed frustration at best practices not traveling well between manufacturing departments within the same company. This is especially true of best practices adopted from outside the organization. "It tends to be resented by other parts of the organization who feel if it's not invented here, why should I bother," he says. The ability to change has always been a hallmark of successful manufacturing firms, and IW's research confirms that while organization barriers are the greatest obstacle, their elimination is a key strategy for companies looking to improve their lot through organizational maneuvers. Of those companies making organizational changes, breaking down functional silos and flattening hierarchies were credited with providing the biggest boost to the company's competitiveness. Each was cited by about one in four executives. Company's Most Important Change
%
Removed functional silos 27.2
Flattened hierarchies 25.9
Established global business units 20.4
Centralized administration 11.8
Decentralized business units 11.2
Volunteered--no organizational change made 3.2
Refused to answer 0.3
Wiping out functional silos must be punctuated with increasing speed of communication, says John Myron, vice president, manufacturing, for lighting fixture manufacturer LSI Industries, Cincinnati. "Companies must increase the speed of design and development of new products, speed up order entry, and deliver more quickly. This places a burden on the company to go beyond simply eliminating functional silos." To help translate the information for what customers want more quickly to its plants, LSI's customer service and manufacturing management now report to the same individual. In the past customer service had been grouped with sales and marketing. "Customer service now has more of a manufacturing orientation. Gathering the information necessary to successfully produce new products, which makes the factory much more efficient, is high on their priority list." The key external obstacles to growth for manufacturers were easily identified in the IW Census: a soft economy and shrinking markets. Strategies adopted to counter the effect of a slowing economy are varied, and include: focusing on decreasing time to market; rationalizing the product line and increasing part commonality; ramping up new-product development efforts to reach new markets; lean manufacturing; exploiting more Web-based solutions in procurement; and reexamining manufacturing location strategy and sourcing in lower-cost geographic areas. Fully six in 10 executives said some portion of their production would be done overseas this year. Still, downsizing was the No. 1 choice in the down-economy battle to save margins, selected as the most effective cost-cutting measure deployed over the last year by nearly one in three executives. Some suggestions offered to stave off worker reductions include voluntary layoffs, moving to a four-day week, and limiting job classifications. Employee development still may be the best solution of all. "What I'm finding is that the skill mix and the need to have an absolutely flexible workforce that can move from work team to work team is fundamental if I am going to make sure we keep everyone employed," said Best Plants round-table participant Frank Howe, who is operations director of Alenia Marconi Systems, Broad Oak, Portsmouth, England. The Found Link Performance of their supply chains is a significant issue for all manufacturing companies. Executives responding to IW's survey said that aligning supply-chain partners toward common objectives is their first priority, and getting that right was deemed of "significant impact" in supply-chain performance by over half of respondents. "I'm talking about suppliers that are totally integrated into the prime company's organization," says Alenia Marconi's Campbell. "The supplier understands the bids the prime is making, helps engineer those products, and, if necessary, is willing to take a lower margin to win the business, and then [puts] people on the line to engineer costs out." Impact of Supply-Chain Initiatives (% Of Respondents)
Minimal impact Some impact Significant impact Don't know/Refused to answer
Standardizing technology among partners 52 27 20 1
Sharing real-time demand data with partners 39 29 31 0
Integrating front- and back-end systems 29 34 36 1
Aligning partners toward common objectives 22 24 53 1
Sharing of sensitive demand data is one expression of a company's trust in its supply-chain partners. IW Census results reveal that nearly one-third of executives polled said sharing real-time demand data with partners has "significant impact" on supply-chain performance. "We are tying our top 10 or 12 suppliers directly into our production-planning server so that everyone is driven by the same system," says McCain of Electrolux. "We will not issue releases daily. Instead, these vendors will each have a blanket order for the year that says we are committed to this level of volume, so they can do their manpower and materials planning. Then, because they are linked to our production-planning system, they will provide materials to us based on their assessment of our demand, and it will be their responsibility to get that material into the plant." Sharing real-time demand data with supply-chain partners for most companies, however, is still troublesome according to our survey. Over 40% of executives polled said it is still a "significant challenge" to achieving an integrated supply chain. Standardization of the underlying technology to support data sharing was cited by an equal number of executives as a significant supply-chain-integration challenge. The initial selection of supply-chain partners significantly affects the success or failure of the relationship, say Census respondents, who also indicate that they look for equality in those relationships. "We are a midsized company," says LSI's Myron. "We try to find suppliers that are in the midrange of their industry, so the relative importance of the business to each other is fairly equal." Forecasting their customers' demand is another supply-chain challenge cited by manufacturers. In fact, says Lake Region Manufacturing's Camp, "It's our biggest challenge moving forward." Each year his company produces tens of millions of guide wires, products that are commoditized and "ordered like hamburgers at McDonalds with little attention to forecasting," he notes. Significant volume fluctuations, with customers calling for rapid response and short leadtimes, place a burden on workforce management, according to Camp. "My operation is like a Greyhound bus. I can stop it pretty doggone quick, but it doesn't have acceleration worth a hoot!" To address the situation Camp carries some inventory as a safeguard, does a lot of employee cross training to allow movement between manufacturing functions, and balances production among its three manufacturing facilities. Costly Quality Miscues Serious quality problems surfaced in 2001. Some, such as those at Ford Motor Co. and Bridgestone/Firestone were well publicized, while others never came to public light but still affected companies' performances. Some 85% of Census respondents admitted having quality problems over the last year. Of those, fully three-quarters said quality problems had an impact on their internal costs and margins. Another 15% said issues of quality affected revenues, while one in 10 admitted quality problems impacted market share. Building in quality at the product design and development stage is a common best practice suggested by Census respondents. "We track warranty issues and try to get patterns out of that information," says LSI's Myron. "Then we spend a lot of time looking for root cause -- something fundamentally wrong that allows defects to occur. One of the biggest conclusions that came out of these ongoing studies is that you have to simplify your processes and the design of your product. You can replicate building a simpler product more reliably than a complex one."
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