2010: Year of Recovery for Manufacturers But Not Without Fundamental Changes

Feb. 28, 2010
This will be the year of 'optimization', not just 'management' but finding better ways to drive out waste and maximize productivity.

The consensus among manufacturing executives is that recovery is under way, but that business models will be fundamentally and permanently changed. What emerges are markets that adjust quickly -- an intelligent economy. What is needed from IT organizations are new investments that can provide information to executives that speed and improve decision making.

Each year, we put together our list of top ten predictions for the worldwide manufacturing industry and as expected, 2010 was particularly interesting on several levels. The impact of the severe economic conditions that began in late 2008 was considered as well as the consensus that the industry in recovery will be permanently changed and calibrated to new market realities. And, since 2009 was the end of a decade, we looked further back and forward when researching our predictions with manufacturing firms, technology vendors, and industry experts.

Our list of 10 predictions for 2010.

Prediction #1: Companies will transform business models to better meet the needs of increasingly demanding customers.

Prediction #2: IT Organizations will look for cost structures that are more variable as they assist in making technology a focal point of business strategies.

Prediction #3: Manufacturing companies will begin the process of fundamentally rethinking their supply chain structures, evolving from a fixed-cost-driven supply network to a variable-cost-driven value network.

Prediction #4: 'Dynamic Optimization' dominates capability investment to support redefining of the supply chain.

Prediction #5: Manufacturers will look to better align innovation with business strategy.

Prediction #6: Manufacturing companies will become more mature in their use of enterprise PLM applications.

Prediction #7: Manufacturing companies will see factory assets as part of a fulfillment capabilities network.

Prediction #8: Firms will create intelligent fulfillment capabilities networks.

Prediction #9: Smart services and the need for persistent assets create the inflection point for RFID, sensors, and M2M.

Prediction #10: Armed with metrics, manufacturers move from sustainability reporting to intelligence.

Overall -- Resetting for Demanding Customers

Manufacturers generally face a global market that forces them to serve two masters. The first are the developed markets of North America, Western Europe, and Japan where buyers (both consumers and businesses) expect products uniquely suited to their needs. The other is the emerging markets where rising buying power (both consumers and business) represents future growth, but based on products that are massed produced for cost advantages. Both masters are very demanding and companies must transform their business models to align with serving both sets of needs.

In the near term, companies will look to more consumption-based IT cost models that allow them to scale up or back resources as necessary. This mind set will create the initial path for the three major investment areas in the coming decade -- cloud computing, virtual ERP, and "socialytics" (the combining of business intelligence with social networking). This cost strategy will allow IT organizations to more directly support new business models, many of which are based on leveraging sophisticated technologies and information.

Supply Chain -- Recalibrating Cost and Product Flow

The overall theme for our supply chain predictions this year, and indeed our research for 2010, is the notion of rethinking supply chain structures in an effort to move to more of a variable-cost-driven rather than a fixed-cost-driven network. Clearly this is a response to a great deal of uncertainty about whether individual markets or companies will return to sales and volume levels pre-recession or whether current, hopefully post-recession, levels are the new baseline -- the 'new normal'?

Although it runs the risk of becoming something of a buzzword, we believe that 2010 will be the year of 'optimization', not just 'management' but finding better ways to drive out waste and maximize productivity. Broadly, we anticipate strong interest in inventory management, sales and operations planning, quality monitoring and full network optimization.

The ability to respond quickly to changes in the business environment represents one level of performance, but being able to do it quickly and optimize the elements of the business mix has been a characteristic of the best-in-class companies. We see this very much as an aspirational goal for manufacturing companies in 2010 and will inform their IT investment choices.

Product Management -- Lean Innovation

Companies will engage in "lean innovation." They will invest in "core" innovation where it is needed to explore new concepts and technologies to create IP and product leadership. At the same time, they will look for opportunities to reuse assets and IP in new products and services, as well as outsource activities that are not core to the business. Successful companies will find the right balance between these three strategy components.

Manufacturing companies will focus on standardizing the product development environment based on a single PLM/PDM platform that supports multi-CAD operation based on trusted interoperability standards.

The move to a single PLM instance needs to be considered carefully, especially for very large enterprises and conglomerates. Additionally, as product companies expand global operations and diverse their design and supply partner networks, they continue to operate in a multi-PLM environment.

Operations -- Factory Assets Become Strategic

Last year we highlighted that manufacturers were rediscovering the value of their manufacturing assets, that they were no longer trying to play the asset arbitrage game (selling off to improve return on asset performance) and were thinking of their manufacturing investments as a key control point in competing on fulfillment excellence. Think of fulfillment excellence as operational excellence from the customer's point of view.

Companies will build networks that are instrumented, integrated and intelligent.

The modern fulfillment capabilities network will be instrumented to support accurate, complete, and timely data acquistion. This requirement will move well beyond transactional reporting or sensor data going into some temporal data historian. Rather continuous data acquisition will benefit from interpretation at the edge and will support tracking schedule, quality, cost, asset and product information.

Integration may be the most interesting element. Companies have been investing in factory information technology that connects the "top floor to the shop floor" and this investment will continue. However, in 2010 companies will also begin to understand that the factory automation, manufacturing execution, scheduling, and reporting should also be better integrated to order management, logistics, and warehousing to complete the fulfillment process.

Similarly, manufacturing intelligence should become fulfillment intelligence with a full view of how orders are being satisfied. Analyzing historical performance, identifying current exceptions, and simulating future scenarios will all be part of connecting a fulfillment strategy to tactics to execution. Realizing better decision making about how capabilities are used will be a key competitive differentiator for manufacturing companies.

Hot Topics -- Smart Services and Sustainability

In the last couple years, a large number of manufacturers and technology providers have reached the point where they treat RFID, sensors, and machine-to-machine (M2M) as foundational technologies that play a critical role in increasingly well defined and valued use cases. What's common across those use cases is the fact that many of these solutions wouldn't exist without data acquisition technology. Now that we're past the basic hurdles of RFID and M2M and sensors, companies are able to see the possibilities. And this is exactly our point for 2010 -- that in the coming year, the ability to provide smart services and to persistently track and monitor an asset create a sufficient business case for adoption to reach the inflection point.

In 2007, just under 1500 companies completed the Carbon Disclosure Project report. In 2008, that number grew by more than 50% to just over 2200. The Global Reporting Initiative (GRI) estimates that more than 1000 organizations worldwide issues sustainability reports based on its GRI G3 guidelines in 2008, up from 685 in 2007. And this doesn't even begin to account for the voluntarily increasing number of sustainability and corporate social responsibility reports and the competition to participate in sustainability indexes like Dow Jones Sustainability Index and FTSE4Good.

The increase of reports using publicly available reporting requirements is a significant step, but we believe the leaders in manufacturing want to do more with the information they've collected from their own products and processes and into their supply chain. The next step is to create intelligence -- to apply the information to make better decisions about their material selection, sourcing, use of limited resources, product lifecycle, supply chain, and more. Companies are showing an increasing willingness to make changes to fundamental business processes, to Design for Sustainability and Cradle to Cradle, or Greening the Supply Chain, for example.

IDC Manufacturing Insights Guidance

There is consensus that markets and business models will not revert to the old, pre-recession ways of doing business and that we are ushering in a new "intelligent economy." Manufacturing Insights recommends the following investment areas to raise your organizational IQ:

Smarter Processes -- ERP instance consolidations and modernization will begin to pay dividends when the resulting process platform is wired to collect relevant information faster, more accurately, and in a more timely way. An investment program that seeks to make these processes fully autonomic and self healing should be initiated.

Smarter Products -- Product design has moved way beyond traditional considerations and are now augmented by sophisticated electronics, highly functional software, and tailored services. This trend will have implications for the role of IT as an advisor on how to develop these products. At a more tactical level, the trend will influence how companies must invest in mature PLM capabilities. Make sure your company understands these needs and invests properly.

Smarter Plants -- Factories can no longer be islands unto themselves, isolated and independently operated. Rather, the facilities must be better integrated to the network of capabilities managed by your global operations personnel and focus on raising fulfillment excellence. Operating responsibility should come under the supply chain organization and decisions about technology investments must move to IT and given the appropriate (high) priority.

SmarterPeople -- Investments in analytics and business intelligence are of little value if the people within the organization are constrained in their corrective action. A new generation of corporate knowledge management, one built organically on operational evidence and advanced collaboration tools, will emerge and pay tremendous dividends. Manufacturers must invest to not only put information in the hands of knowledge workers, but also the communication tools to take action on that information.

Smarter Partners -- Of course, success will continue to depend on a manufacturing firm's ability to also incorporate the information and expertise of its partners -- suppliers, sales partners, customers, and regulatory bodies -- to its advantage. In fact, it will be even more critical in the intelligent economy. Any investment program undertaken should consider the impact of including external constituents.

IT investment decisions should give preference to those products that can be delivered in a consumption or variable cost way. The IT operating leverage in terms of cost that this yields will mitigate any risk of recovery turbulence although companies must acknowledge that incremental costs remain higher as demand increases. Overall manufacturers should describe the key IT services they will be consuming over the next decade while targeting a 20% reduction in cost in each five year period.

Bob Parker is Group Vice President, Research for IDC Manufacturing Insights which provides fact based research, benchmarks, best practices, and business cases. www.idc-mi.com

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