With the recession softening manufacturers' first-quarter revenues, Wall Street analysts are emphasizing different barometers -- particularly operating margin -- to gauge companies' success.
Leading manufacturers are taking steps to improve margins by running as lean as possible, ensuring continued focus on quality and compliance and reacting swiftly to take advantage of new revenue opportunities as a result of the economic environment.
While IT is not spared from cost-cutting initiatives, smart companies are making targeted IT investments that provide quick ROI, particularly in areas that support the organizations' differentiating business and manufacturing processes. This dual strategy of selective cost-cutting and targeted investments in IT from an end-to-end process perspective typically has delivered larger returns than focusing purely on cost-cutting measures, according to a report titled "Managing IT in a Downturn: Beyond Cost Cutting" in the September 2008 McKinsey Quarterly business journal.
This counterintuitive approach has marked a shift in C-suite purchasing and decision-making that is likely to become the new norm even when the economy recovers. As early as last fall, companies began shifting more IT purchasing and decision-making power to the CEO, CFO and COO levels -- and beyond the traditional realm of localized budget approvals into aggregated decisions -- because the combination of limited access to capital and declining revenues is forcing companies to more closely manage budgets in shorter time segments, sometimes from quarter to quarter or even month to month.
As a result, the C-suite is taking a more bite-sized approach to selecting software that solves immediate pain points, can be paid for easily and implemented quickly, and provides measurable near-term ROI. From a functionality perspective, it must integrate seamlessly into differentiating business processes and also align with the company's long-term IT and business strategy.
This new emphasis is driving demand for three types of software -- each supporting an end-to-end process perspective -- that is helping manufacturers weather the downturn while positioning them for strong growth when the economy recovers:
1. Performance management software helps manufacturers reduce costs by providing visibility into operations and enabling quick tactical responses to production or supply volatility. Examples include manufacturing visibility and intelligence and inventory optimization solutions that integrate with tactical production planning, procurement, scheduling and execution capabilities. This combination enables manufacturers to respond quickly to supply or demand volatility.
Consider a situation in which cost-cutting measures necessitate a production line (or even a plant) to be shut down, and production needs to be shifted quickly onto other plants so existing order delivery or inventory is minimally impacted. This situation requires deep visibility into -- and tight integration across -- process steps such as demand planning, production scheduling and manufacturing execution.
2. Quality and compliance software helps manufacturers mitigate potential revenue leakage due to product and process defects, non-conformance or quality violations. This includes improving detailed track-and-trace and recall-management capabilities from core production processes across the supply network.
Consider a situation in which a sudden quality defect in a key component required for one of your best-selling products is introduced by one of your suppliers. Rapidly uncovering the quality or conformance issue, conducting a root-cause analysis and taking corrective action across the supply network requires a complete view and detailed reporting of compliance and traceability from component to finished assembly, and from the supplier's plant to the store.
3. Revenue-capturing software enables manufacturers to identify and capitalize on new opportunities created by the current economic environment. Such solutions typically support deep insight into customer buying preferences and are integrated into trade promotion management, demand management and production fulfillment processes.
Dramatic shifts in the economy can create new opportunities for manufacturers. Products that may not be in demand today suddenly may be in demand tomorrow. In today's complex global business landscape, it's not enough for manufacturers to have software that provides insight into industry trends, into buying behavior and into product and profitability analysis and processes. Software must integrate seamlessly into trade promotion management and collaborative demand and fulfillment planning solutions to enable manufacturers to more nimbly react to and capture new market opportunities.
Smart manufacturers know they can't afford to postpone strategic IT investments until after the economy improves. By selecting software that can be quickly implemented, deliver fast results and seamlessly integrate differentiating business processes, the CEO/CFO can achieve short-term goals of improving margins while still following the CIO roadmap for creating the perfect plant.
Vivek Bapat is vice president, suite solutions marketing, for SAP.