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Companies willing to envision and embrace ‘Disruptive Complexity’ have great prospects in store for competing and succeeding | The 2014 Global Manufacturing Outlook (GMO): Performance in the crosshairs report examines the continuing evolution of the strategies that manufacturers are deploying to drive value and performance across the enterprise. Manufacturers are still overwhelmingly focused on profitable growth. And this year’s GMO identifies a wide variety of strategies to achieve it. Increasing levels of supply chain transparency and visibility; improving use of data, analytics and business intelligence tools; integration of new technologies; and a continuation of the trend towards greater partnerships and collaborative business models are at the forefront of these strategies.

But new strategies also bring new challenges and complexities. Based on this year’s report, there is clearly much work still to be done to leverage the power of these business models, tools and technologies to ultimately overcome the complexities of data proliferation, the accelerating pace of change and disruptive innovation across the sector.

Key findings from the 2014 report include:

  • Manufacturers are focused on understanding their product cost and profitability. Only 12% of respondents said they were ‘very effective’ at determining product profitability. Many suggest that they plan to commit either moderate or significant investment into enhancing their systems and processes for profit and cost information. More than half say that – over the next two years – they will place either a moderate or high priority on adopting processes and systems to achieve real-time measurement of product cost and profitability.
  • Organisations are rethinking their product development strategy. Respondents are increasingly focused on enhanced spending, shifting towards breakthrough innovation objectives and exploring new collaborative business models to create competitive advantage. 70% of respondents said they would double their level of spend in R&D. Yet at the same time, 88% said that partnerships, not in-house efforts, would form the future of innovation. Technology is also coming into play; three-quarters of respondents say they are better leveraging decision-support technology in their R&D function.
  • Supply chain transparency and visibility remain a key challenge for manufacturers. 40% of respondents admit they lack visibility across their extended supply chain, with 33% saying it was due to either inadequate IT systems or a lack of skills. Research suggests that many of the gains in supply chain visibility have resulted from stronger relationships between manufacturers and their top-tier suppliers and the willingness to share more real-time data across the value chain.
  • A majority of respondents think they could achieve a globally integrated supply chain within the next three to five years. More than half say that they use global demand planning and global capacity planning technologies in their supply chain. More than three-quarters say their relationship with top tier suppliers is now strong enough for them to share real-time capacity and demand data.

Manufacturers around the world will want to focus on increasing visibility into their profitability and costs. Indeed, when asked how effective their organisations are at determining their profitability, respondents from the aerospace and defense (A&D) and automotive sectors rate themselves among the least effective at determining their profitability: 47% of A&D respondents admit to being ‘somewhat effective’, while 45% of automotive respondents admit the same. “A&D and automotive manufacturers tend to be very effective at determining their costs against a set forecast, but face significant market uncertainty and demand fluctuations,” noted Doug Gates, head, A&D, KPMG. “Ultimately, this means that they struggle to determine overall profitability.”

The survey suggests that few manufacturers feel that their data is meeting their needs. In fact, more than half of the respondents of the survey say they have no data that they would deem ‘highly reliant’; almost a third reported that they can’t rely on their pricing data and around a quarter say they can’t rely on their profitability data. “Clearly, there is a big difference between knowing where your data comes from and knowing that it is the right data to inform better decision making,” noted Jeff Dobbs, global sector chair, industrial manufacturing, KPMG. “This isn’t about getting the most data, it’s about having access to the right data at the right time to drive financial decision-making.”

“Many of the strategies that we are seeing being deployed in the market today are focused on breaking down the data and systems barriers within highly siloed matrix organisations to deliver a clearer view of the business,” noted Bruce Rogers, Forbes Insights. “Technology is really forcing organisations to identify and break down the artificial barriers between their organisational structures.” The survey results suggest that the journey to better understand profitable growth is moving from standard monthly reporting to dynamic analytics. The importance of driver-based analysis and scenario and predictive modelling suggests a new management focus on what will or could happen, rather than what did happen.

According to the survey, manufacturers are seeking to catalyse a ‘stepchange’ in their growth prospects. Many are clearly focused on increasing their investment into R&D. Indeed, whereas the majority of respondents say that they spent just 1% or less of their revenue on R&D and innovation over the past two years, the findings suggest a doubling of their spend over the next two years. Manufacturers also seem to be increasingly interested in investing in ‘breakthrough’ or ‘disruptive’ innovation alongside efforts to enhance existing product lines. 36% of respondents across all sectors report that they are now focused on breakthrough innovation. “Innovation has been a major theme for manufacturers in the emerging markets,” notes Richard Rekhy, CEO, KPMG India. “But, whereas much of the focus was once on product innovation (particularly in creating global products with local flavor), today’s manufacturers are now looking at innovation across other management spheres such as cost optimisation, feature addition and partnership value programs which aim to generate innovative ideas in collaboration with suppliers and business partners.” He opines that in India, for example, companies are keenly focused on collaborating with supply chain and logistics providers to improve reliability, enhance capacity and reduce costs by identifying and maximising process and business practice innovation.

There are clear indications that – if they could – manufacturers would like to spend more on innovation. In fact, almost half of all respondents say that a lack of R&D funding is one of the three biggest challenges impacting their ability to innovate. But with challenges securing new funding, many manufacturers are instead focused on stretching their R&D investments as far as possible. And, as a result, there has been a significant shift towards the development of research partnerships, the introduction of new technologies and the adoption of more collaborative business models with suppliers and – at times – competitors.

However, it must be noted that – given the uptick in transactions and M&A activity over the past year – there is some indication that manufacturers may be looking to buy innovation rather than create it. Indeed, it is altogether possible that these capital expenditures are still focused on achieving the same overall objective: growth through innovation. The survey also demonstrates that challenges related to visibility have vaulted up the agenda for manufacturing leaders. Indeed, respondents are now twice as likely to admit that they lack visibility across the extended supply chain as they were last year. Interestingly, a third of respondents suggested that their lack of supply chain visibility was a direct result of inadequate IT systems; an equal number pointed to a lack of skilled talent as impacting the effectiveness of their supply chain.

Given that most visibility programs in the past were heavily geared towards reducing supply chain risk, it is encouraging to see that resilience has greatly improved over the past year. With improvements already flowing through their risk management, the respondents suggest that the focus of their visibility initiatives has now shifted towards better managing costs. Indeed, more than half of all respondents say that costs are now their greatest motivation for improving visibility.

According to the research, many of the gains in supply chain visibility have resulted from stronger relationships between manufacturers and their top-tier suppliers. In fact, more than threequarters of respondents say that their relationship with top-tier suppliers is now strong enough for them to share real-time capacity and demand data. An even higher proportion (83%) say that they feel that their top-tier suppliers’ data is reliable enough to support closer relationships; effectively setting the stage for manufacturers to move from traditional supply ‘chains’ to supplier ‘networks’. At the same time, technology is also being leveraged to improve visibility and supply chain integration.

When asked what their biggest obstacles were to adopting new technologies within the supply chain, more than half of respondents point to a lack of mature technology. Given the rapid pace of change in technologies and packaged solutions, this is not entirely surprising. However, the fact that only one in five respondents say that governance is a problem, and less than one in ten cite challenges related to securing support from either the business or the enterprise, this data suggests that perhaps decisionmakers are waiting for technology to mature.

“An efficient, effective and integrated supply chain is absolutely critical to managing the disruptive complexity that is now upon us,” says Dobbs. “This isn’t just about wringing more efficiencies or costs out of the supply chain; this is about using your supply chain strengths to improve the overall profitability of the company and to create a platform for sustainable growth.

About the survey:

The Global Manufacturing Outlook 2014 is based on a survey of 460 senior executives conducted by Forbes on behalf of KPMG International that was completed in early 2014. Respondents represented six industries: aerospace and defense, automotive, conglomerates, consumer products, engineering and industrial products and metals. Respondents were distributed fairly evenly between the Americas, Europe and Asia.

Jeff Dobbs

Global Sector Chair, Industrial Manufacturing

KPMG

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