For many people, the word "manufacturing" conjures up a picture of a world of tangible objects, where physical transformation and assembly processes convert raw materials into products of almost infinite variety.

Go back enough years, and this focus on the materials and physical processes of manufacturing was key to running a viable business. Making money depended on efficient use of the means of production - the materials, machines and factory workers.

But the last few decades have seen a steady transition away from this focus on the material handling side of the business. Now, the key asset of a manufacturing business is its know-how. The know-how in design, in manufacturing processes, in production management, in distribution, and in commercial aspects, (such as the ability to create franchise or licensing deals to cover new markets) these are the sources of competitive advantage.

Globalisation and improvements in global transportation have worked hand-in-hand to drive this change. Consider engineers at a European electronics manufacturer, planning future production. They have new parameters to look at. For example, they are no longer building products for local consumption; they are building products that will be used around the world. Also, when they consider their options for production, they know that infrastructure improvement in the "low cost" economies make it worth investigating the location of factories in these regions. So the alternatives they will have to evaluate include a highly automated, high-tech production line in Europe, serviced by a few high cost operators and maintenance organisations; and a traditional production line in a lower cost region, where there is only the capability to run and maintain basic equipment and processes. This would require different enterprise applications, Warehouse Management Systems rather than Manufacturing Execution Systems.

Given this neatly-defined problem, it is easy to imagine a well-defined calculation producing the "right" answer. However, the big picture of manufacturing is not nearly so well-defined, and senior managers of manufacturing organisations have to ponder on a range of big questions to which there are no easy answers.

For example, consider the lifecycle of a can of soft drink. Some years ago, researchers at Cardiff Business School studied the life of the aluminium used to make the can. Starting the clock at the moment the bauxite ore was scooped out of the ground in Australia, and then 319 days later the can was available on a supermarket shelf in the UK.

Now, imagine your business includes something to do with canned soft drinks, and you are trying to improve your position in this 319-day value-chain of processes and business-to-business transactions that result in the offer of drink to the consumer. The first question you probably want to ask is where is the profit? This is a key aspect as you try to guide your organisation to the parts of the value chain that are right for you. But wait a minute. If your existing know-how is in bottling and canning, it is highly unlikely that you are going to advise your company to buy a bauxite mine and hire some miners - whatever the profit from that stage of the process. But why not?

Of course, the answer is to do with know-how. You would quickly recognise that it would take years for your company to progress far enough along the bauxite mining learning curve for you to be competitive with specialist companies in the field. So, unless you had discovered, or felt you could discover, some new "trick" to this business, your bauxite mining venture could handicap your business for many years.

This is an extreme example, and seems relatively easy to answer. However, it is worth remembering that we are conditioned by the thinking of our times. In a different era, Henry Ford was very successful with a vertically integrated business. He controlled just about everything needed to make Model-T Fords - from rubber plantations for tyres, to assembly plants for final production. But in the present era, this is not a solution that is generally accepted as an optimum response to the questions that face manufacturing companies. Instead, a widely accepted blueprint for strategy is to focus on core competence, become the unbeatable world leader, and then participate in every value chain that needs this competence.

But this approach contains the concept of core competence, which can be quite slippery in the wrong hands. It is perhaps wise to think of the phrase "added-value" whenever you consider "core-competence" - this at least leads to fairly quick realisation that it is not enough simply to consider a skill. For example, imagine your company is the very best at a specialist form of plastic injection moulding - say, creating results that look like natural rock. Does this necessarily mean your "core-competence" is creation of rock-simulation plastics? In addition, remember to consider the "added-value" in this business. To do this, you need to understand the demand, and forecast demand, for this particular type of plastic, and be able to judge the price the market will bear. Will your skills allow you to charge a premium? Is the level of demand enough to allow you to grow? As soon as you start this analysis, it becomes clear that there are many factors that command a premium price.

One of the key difficulties is forecasting. Like people throughout history, we recognise that the rate of change now is faster than ever before! Of course, everyone has been right. As tools to communicate, drive, manage and assimilate change have improved, so has the rate of change increased to stay approximately at the constant limit that people, - using the tools of the day, - can handle. Advanced Planning Systems combined with Internet based daily conferences can at least ensure everyone in a supply network is working to the same demand plan.

However, of course, there are some absolute values involved in planning manufacturing businesses - for example, making a decision to build a factory. The payback period for the factory must be less than the length of time for which demand for the product can be forecast. The increasing rate of change reduces the time horizons of reliable forecasting, but if these horizons are still beyond the payback period, then it is still possible to make investment decisions in the usual way. If, however, the increased rate of change means that the longest time horizon for forecasts is shorter than the payback period for the factory, then things have to change.

At the factory level, one response is flexible production facilities. Instead of the single purpose production line, one can put together a set of machines and workcells that can quickly and economically be reconfigured to produce alternative products. Faced with this additional requirement, the engineers we looked at earlier, planning production for a European electronics manufacturer, now have to imagine the transition plans they could build into the two alternative production strategies they are considering. For the highly-automated European production line, they can probably implement even higher-tech, flexible systems. For the traditional production line destined for a low-cost region, it may make economic sense to disassemble and rebuild the line as needed.

Engineering and production are not the only parts of a manufacturing business. At the financial level, a classic business strategy when faced with uncertainty is to convert fixed costs into variable costs. Don't buy assets, rent them. It is a fairly short step from here to outsourcing, subcontract manufacturing, partnerships and joint ventures.

For the engineers, this environment creates new possibilities. It may have been difficult to justify highly-automated, flexible production facilities to satisfy the demands of just one company. But if these facilities are transferred to an outsourcer, or subcontract manufacturer, then suddenly they can be applied to the needs of multiple companies, who are now the customers for the subcontract manufacturer. The result is an easier justification for the additional up-front cost of flexible factories.

So the scene is set for exactly what we observe in the market today - namely, a tendency towards fragmentation. Organisations have recognised that the difficulty they have in forecasting the future means they can no longer operate with the economy-of-scale, but inflexibility, of an oil tanker - instead they must behave like a flotilla of synchronised speedboats. Sometimes these smaller units operate under the original enterprise umbrella, sometimes they are made independent, or they merge with external companies. Whatever the corporate structure, information technology has offered the capability to aggregate and consolidate status information from each of the smaller units, and communicate new requirements, thus enabling coordination of the multiple speedboat organisations.

This is the environment in which know-how becomes the critical asset. To be the king-pin, that can drive supplier prices down, and command premium prices from customers, your organisation has to know how all the various nodes in the resulting value network fit together, not just how they fit now, but also how they may be made to fit together in the future.

If your organisation has this know-how, then you can ask, and answer, the big questions. Does a car manufacturer need to make cars? Perhaps it is enough to place subcontracts with independent designers in tune with consumer preferences, then work with a manufacturing engineering partner who can plan how to produce the resulting designs, and then work with subcontract manufacturers who can build cars on demand?

Different industries have reacted to this environment in different ways. In chemicals, for example, there has been a polarisation of strategies. Some companies have moved towards offering 'solutions'. For example, instead of selling paint by the kilogram, they have set up painting operations for customers and are being paid per painted unit. Other chemical companies have selected materials for which they feel confident about demand, and focused on large-scale, low-cost production and distribution operations. In electronics, sub-contract manufacturing has become a major factor in almost all high-volume production.

So the new manufacturing has moved a long way from the heat, the sound and the smell of material transformation processes. IT applications must enable an industry network to satisfy customers, with each business in the network adding optimum value. To understand the applications, and how they fit together, you will need a deep appreciation of the design, production and distribution processes. But you will control the network from your computer terminal.

Peter Thorne

peter.thorne@cambashi.com

A version of this article was first published in Conspectus in December 2003.,

Other Cambashi articles that may be of interest:

There's more to life than automated drafting tools for electrical design

Who will pay for the Building Information model?

Is PLM applicable to AEC?

back to top