Equipped to operate in high gear

Manufacturers retool their IT strategies to cut costs and realize greater profits with more timely, accurate information.

by Alan Joch

Globalization. Outsourcing. Bare-bones profit margins. Manufacturers just can't seem to catch a break in today's ultra-competitive business environment. Nevertheless, companies producing automobiles, consumer packaged goods, high-tech hardware and industrial equipment have quietly achieved a steady level of success not enjoyed by many other industries. According to the Institute of Supply Management's Manufacturing Report on Business, this past December saw the 19th consecutive month of growth in the manufacturing sector in the United States. Western Europe has also logged some modest increases over the last year, while manufacturers in Asia, particularly in China, continue to enjoy boom times.

Taken together, these are reasons for optimism. But not every manufacturing organization benefits equally from prevailing business opportunities. At the top is a select group of companies that are innovation pioneers—in product development, demand forecasting, supply chain management and customer service.

Thanks to innovative processes and more tightly integrated relationships with their suppliers and customers, these leaders are poised to achieve the biggest gains in profits and market share in the coming years. According to a November 2004 report from AMR Research, $488 billion in untapped annual operating margin is available to U.S. manufacturers alone. The companies that will capture that capital are the organizations that use information technology as a strategic planning tool.

Driven by demand
Technology has driven much of the manufacturing sector's success in the last decade. The aerospace industry, for example, has logged cumulative productivity gains of more than 60% since the early 1990s, thanks to new IT systems.

"We're at a point in manufacturing where the use of technology is going from being internally focused, for driving efficiencies within the four walls of the firm, to focusing on efficiencies looking outward," says Robert Parker, vice president of research for IDC Manufacturing Insights, Framingham, Mass.

The hallmark of this new outward view is what Boston-based AMR Research calls "a customer-centric pull model." This model proactively identifies and manages customer demand, contrasting with traditional "push" supply chains, where companies produce goods and then find customers. Demand-driven supply networks gauge success by measuring the following:

• Perfect order rates (the ability to deliver the right product to a customer at the right time)
• Total supply chain costs
• The accuracy of demand forecasts
• Product innovation success

These benchmarks help a manufacturer balance trade-offs between cost and service and how well cash flow is managed.

Payoffs can be big. An AMR study recently concluded that companies with accurate demand forecasts reduced inventories by an average of 15%. In addition, they reported and experienced a 17% rise in perfect-order performance and had far fewer stockouts than their competitors. These efficiencies map directly to bottom-line benefits. The study found a 10% increase in perfect-order rates can improve per-share earnings by an average of 50 cents. Even a 3% perfect-order gain is valuable: Companies saw a 1% boost in profit margins.

Meeting demand
Most manufacturers are in the early stages of implementing demand-driven supply networks. IDC's Parker estimates 80% of the manufacturing industry is still honing its internal processes to increase productivity. Only about 5% of all manufacturers are actively taking advantage of outward-facing supply efficiencies, he says. Notable leaders include such manufacturers as Dell, Proctor & Gamble and Toyota.

If the potential of demand-driven supply networks is apparent, so are the consequences of not implementing them. Faulty demand forecasting can send negative ripples throughout the supply chain.

"Companies need to make demand information more reliable not just by communicating with their immediate suppliers, but also with their suppliers' suppliers; not just with immediate customers but their customers' customers," Parker explains. "The more visibility a company can create, the more efficiently it can run its supply chain."

Supply chain inefficiencies affect far more than the balance sheet. In January 2002, Supply Chain Management Review studied more than 1,100 companies experiencing supply chain problems—and the results were sobering, to say the least. Companies announcing supply chain difficulties saw a 7.5% drop in their stock prices the day of the announcement; over the 12-month period bracketing the announcement, the total decline was 18.5%.

The IT factor
The need for demand-driven supply networks and accurate forecasting will lead manufacturers to install new types of IT systems. "The real productivity leaders will be those who can see the big picture," Parker says.

These new requirements herald the end of what Parker sees as a period characterized by programs that effectively produce information and will usher in an age in which software helps planners use information better. "If the last era was about processes, the new era is about re-engineering decisions," he adds. "The ability to aggregate, organize and deliver relevant information in a timely way will separate the next generation of productivity leaders from the previous generation."

Success comes from implementing processes that put information to use by rerunning demand plans and sourcing plans and then connecting all the dots. "It's not just business intelligence, but the ability to take the right action according to the situation," Parker believes.

This requires breaking down information silos. "Manufacturers must make trade-off decisions in favor of the end-customer's needs, not for internal measurements like inventory levels," says Roddy Martin, vice president for consumer packaged goods and life sciences industry strategies at AMR. Instead, analytical systems need to help companies react to the reports their systems are producing. "If I'm an inventory manager and I get information that inventory levels are low and there's a likelihood of an out-of-stock situation, I have to push that information to an individual who can do something about it." Martin calls this enterprise performance management (EPM).

EPM offers benefits including cost avoidance and inventory reductions, using an enterprise data warehouse (EDW) to aggregate information and provide the foundation for analytics. An EDW also provides faster access to current and historical data. Without this capability, decisions are based on less-than-timely batch reports, widening the gap between planning and execution and increasing the likelihood of misjudgment because daily operational variations aren't taken into account.

"Companies have been building data warehouses for years, but they often didn't focus on enterprise-level data. Instead, they were building subsets of information to look at costs or sales or capacity management," notes Martin. "Companies could tell you their manufacturing systems produced 15% defects or that inventories were reduced 10% in the last year. But they couldn't determine their perfect-order performanceÑwhether they were delivering products the customer wanted and on time. The key is to start with one version of the truth, and that lies in the enterprise data warehouse."

Business synchronicity
One consumer packaging heavyweight realized that its entire organization had to be focused on getting products to retail shelves. "You might have manufacturing working on reducing costs, planners working on optimizing capacity, the supply chain working on reducing inventory," explains Martin. Even if each area achieved its individual goal, the company still might not improve upon its ultimate goal: better performance in delivering orders to customers.

That company became a leader in leveraging IT investments to achieve business performance goals. "In the past, companies often put in technology for technology's sake without understanding the bigger picture. Companies now realize they have to consider technology plus processes plus organizational capabilities. This enables manufacturing to operate as a demand-driven value chain focused on delivering products to end users," Martin says.

Technology and process adjustments aren't enough. Manufacturers may need cultural change. Most companies employ a vice president of supply, focused on product warehousing logistics. At progressive companies this position serves to bridge the divide between sales and operations. "It's a big cultural leap," Martin believes. "In the past, the manufacturing operation would make as much product as it could and sales would try to sell everything that was made. Now, there's a recognition that the two sides should sit around at the same table and say, 'Let's make more of what's selling and not make the things that aren't moving.'"

Tag teams
A new component in creating the "single view of the business" is radio frequency identification (RFID) technology. RFID tags attached to products automatically feed supply chain data into demand- driven supply networks. By automating this step, RFID provides accurate, timely data to key manufacturing processes, with greater insights into supply chain status and efficiency.

But RFID is evolving; its cost—from about 30 cents to $1 per tag—is still too high to attain the per-product granularity that proponents promise. "We're years away from seeing RFID becoming pervasive enough in the manufacturing supply chain to track every item with that kind of accuracy," Parker says.

The CRM component
Parker calls customer relationship management (CRM) "the third leg of the stool" for manufacturer growth. "Record numbers of new products are being introduced every year, a result of manufacturers seeing a much finer segmentation of their markets and their ability to create products that address each of those segments," Parker explains. "CRM helps companies collect customer requirements, connect those requirements with the new product development process, and then get the products in volume production and ship them to market fast enough to beat the competition."

How essential is first-to-market speed? Parker points out that a successful new product in consumer packaged goods garners 25% more revenue than the No. 2 product; come in third with an introduction and you can expect 35% lower revenues than the leader.

Future growth
Today's most effective supply pipelines flow in two directions. In the long term, the supply chains being developed now could become conduits for supplying finished goods to the world's almost boundless consumer market.

"Investing in supply chains isn't just about lowering production costs; it's a way to build a distribution network to open up what could be huge new markets," Parker says. T

Alan Joch is a New England-based business and technology writer whose work has appeared in The New York Times, Fortune, Small Business and Byte.