A Framework for IT Investment for Manufacturing Executives

Feb. 15, 2012
Executives feel vulnerable to three technology-enabled threats: a) shift in customer expectations to a better or differentiated offering, b) significant changes in product and service delivery costs and c) the emergence of new products or services from co

Information technology is changing the competitive dynamics in the manufacturing industry. For example, manufacturers are using technology to improve their operational efficiency and use it to put pricing pressure on their competition; or significantly improve customer service and use it to steal market share from the competition; or identify new business opportunities before anyone else and use it to grow their topline.

However, technology is a double-edged sword -- it is not just a source of competitive advantage, but it can also be a source of disruption for the competition. A recent study by the consulting firm McKinsey concluded that executives feel that companies are most vulnerable to three technology-enabled threats: a) shift in customer expectations to a better or differentiated offering, b) significant changes in product and service delivery costs and c) the emergence of new products or services from competitors.

The only way to prevent being disrupted is to pursue the information technology agenda aggressively yourself. Such an approach will not only provide you the competitive advantage you need to grow, but it will also ensure you are not the one who gets disrupted. But given the vast opportunities in investing in IT, how do you decide where to invest first? In this article, I will describe a simple but proven framework to help make prioritized decisions.

As a first step, you can start with mapping your current business processes and their key operational metrics for each of the product lines/business units. Using this information and comparing it to industry best practices/metrics will give you a starting point for identifying the processes that need attention. Once a short list of such processes has been identified, the next step is to prioritize IT automation opportunities in these processes based on their potential business impact and the relative ease with which they can be realized. A 2X2 matrix (see Figure) will enable you to zero in on those opportunities that offer the highest business impact.

In order to construct the 2X2 matrix, you need to answer two questions for each of the shortlist process candidates:
  • What are the quantifiable benefits from addressing the identified issues in this process?
  • What is the effort in implementing the solution, including change management?

Let's look at some examples of investments under the 'low hanging fruit' category (top left quadrant of the 2X2 matrix):

Analytics: As organizations create and store more transactional data within their business systems, they can collect more accurate and detailed performance information on everything from product inventory to revenue by customers/product line. Analytics technology can help companies not only develop scorecards or track trends for key operational metrics, but also calculate insightful information such as product and customer profitability to help make better decisions. McKinsey in a recent analysis noted that a one-standard-deviation increase toward use of analytics correlated with about a 5% to 6% improvement in productivity and a slightly larger increase in profitability in those same firms. The implication for companies is that by changing the way they make decisions by increased use of analytics technology, they're likely to be able to outperform competitors. Many mid-sized manufacturers are in early stages of deploying such technology. Business analytics has become very affordable now for mid-sized companies and has the potential to significantly improve the quality of their business decisions.

Mobile: According to a recent Forrester study, businesses of all sizes are increasingly seeing mobile as an opportunity to drive innovation across a wide range of business processes. For example, mobile CRM apps enables the sales reps, field service staff and their managers to access information about their customers where ever they are instead of needing to call the office to chase the information down. This enables the company to respond rapidly to their customer's issues and needs. Similarly maintenance management mobile apps enable the service staff to verify the maintenance order including tasks and materials needed and execute the order -- all from mobile devices when standing next to the equipment. Project management apps in the engineering industries address a need for real-time visibility and communication for both off-site monitoring from company headquarters and on-site inspection and reporting at the project location. Mobile is increasingly enabling organizations to accelerate the velocity of their business processes, which can be a significant source of competitive advantage. Vendors of enterprise systems are pre-packaging mobile apps with their solution, making mobile technology extremely affordable for mid-sized companies as well.

Customer Relationship Management: Use of CRM technology not only allows organizations to become more responsive to their customers (giving them an edge over other companies), but more important, it enables them to appear bigger in size and richer in resources than they actually are (a huge coup in perception management for mid-sized companies). They are increasingly using it to help sales reps view upcoming tasks and scheduled activities, so they can always be on top of their game. Consumer facing companies are implementing CRM technology to gain customer insights and understand consumer behavior and use that information to guide merchandizing, pricing and promotion decisions. One of the dilemmas for manufacturers is to decide if they should deploy a standalone CRM system or deploy one that comes integrated with their business management system. Complex products such as machinery are made-to-order for customers and their sales process typically requires deep integration with order management and manufacturing. Such products should be supported using an integrated CRM system. Similarly products such as laptops and computers are not as complex but are typically configured to order. The sales force also typically needs to look into manufacturing plan to commit a ship date to customers. Such environments are also better served by an integrated CRM system.

Budgeting and Planning: To compete in today's unpredictable economy; organizations must keep a very close eye on their operational performance and must be able to use that information to continuously update their business plans and budgets. Spreadsheet as a planning and budgeting tool does not allow such fluidity. Leading manufacturers are deploying budgeting and planning technology to gain the capability to keep their business plans fluid, so they can quickly allocate additional resources to take advantage of new opportunities or hold back spending and take a cautious approach when appropriate. This capability also allows them to better exploit the two attributes that give them an edge over their larger competitors -- speed and flexibility.

Example of tactical projects (lower left in the 2X2 quadrant) include a) deploying a self-service system that reduces administrative workload by enabling employees to perform basic day-to-day tasks such as timesheet or indirect procurement themselves b) Deploying an intranet application where employees can share information about their projects with team members etc.

Strategic projects(upper right in the 2X2 quadrant), on the other hand, are very specific to a company and their value is based on the company's current competitive position and its strategic ambitions over the next five years. Examples include deploying a supply chain planning system that enables it to connect and collaborate directly with lower tier suppliers to share plans and gain valuable insight into critical materials and capacity; deploying an inventory optimization solution to reduce inventory within its distribution centers while increasing service levels etc.

With a simple framework described above, you will be able to pick and choose the right IT projects to invest in and become a technology-enabled leader in your segment and in the process, build a significant competitive advantage in the market. More important, you will sleep better, knowing that you are less likely to get disrupted by a new entrant in your space.

Manju Bansal is Senior Director of Global Ecosystems & Channels Solution Marketing at SAP.

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