Volume 17 | Issue 4 | Year 2014

The manufacturing sector is in the midst of period of ‘Disruptive Complexity’ – that we believe will be a major force for all manufacturers to reckon with. Explosive developments in technology, material science, advanced manufacturing and synergistic operating models are clearly beginning to redefine ‘the art of the possible’ and changing the way manufacturing companies compete and succeed.

The market challenges of the past five years, which were largely characterized by global uncertainty, economic volatility, geo-political instability, shifting markets and natural disasters, have resulted in massive changes to the manufacturing landscape. However, these may seem tame compared to the new forces created by the proliferation of data, scientific discovery, robotics, technology and artificial intelligence just to mention a few.

In this environment, manufacturers are still overwhelmingly focused on profitable growth and are considering a wide variety of strategies to achieve it. According to KPMG’s 2014 Global Manufacturing Outlook (GMO), which polled 460 senior executives across six industrial sectors split equally among the Americas; Europe, Middle East and Africa; and Asia-Pacific, manufacturers indicate that 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. 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. Among the strategies and tactics that global manufacturing companies intend to deploy to capitalize on the market opportunities and stay ahead of their competition are:

  • Understanding product cost and profitability to support growth and performance across the enterprise;
  • Implementing predictive analytics that monitor evolving customer preferences;
  • Continuously evaluating models for innovation for effectiveness and return on investment;
  • Leveraging partnerships to create new OEM/supplier collaborative innovation models and create synergies across the value chain;
  • Integrating cutting edge technology such as 3D printing and new additive manufacturing capabilities to accelerate product lifecycles and increase profitability;
  • Utilizing technology and data to support real-time business intelligence and to build trust, visibility and transparency across the supply chain to create virtual vertically-integrated manufacturing networks.

Let’s take a closer look at these areas.

Looking for Profitability
Manufacturers around the world will want to focus on increasing visibility into their profitability and costs. Yet few think they are very effective at determining the profitability of their existing product lines. Indeed, according to the 2014 KPMG GMO, when asked how effective their organizations are at determining their profitability, more than half of all respondents believe themselves to be ‘effective’; only 12 percent consider themselves to be ‘very effective.’ Manufacturers need to better align their cost and revenue data to help drive decision-
making and enhance profitability.

This isn’t simply about getting data and making spreadsheets; it’s about having the appropriate information, at the right level of granularity and – maybe most importantly – with the right speed and frequency to generate timely insight to help people make better business decisions. The reality is that insights around profitability and costs drive today’s competitive advantage.

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. 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.

Given the ongoing shifts that we continue to see in product lines, technology and supply chains, organizations should prioritize a wide variety of analytics and data-driven investments in an attempt to get a better handle on their costs and profits. Many manufacturers are looking for any way they can to get more insight into their business.

Collaborate to Innovate
Manufacturers are rethinking their product development strategy and are increasingly focused on enhanced spending, shifting towards breakthrough innovation objectives and exploring new collaborative business models to create competitive advantage.

The manufacturing world is entering an era of hyper-innovation where advances in technology and material science are rapidly changing what we consider ‘possible’ and creating new business opportunities along the way. Ultimately, those organizations that do not balance investment in ‘incremental innovation’ with investment in ‘breakthrough innovation’ may find themselves left behind their competitors.

There are clear indications that – if they could – manufacturers would like to spend more on innovation. In fact, almost half of all respondents in this year’s KPMG GMO 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, we have seen 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.

Partnerships, in particular, rose up the agenda in this year’s GMO. Almost nine in ten say that partnerships, not in-house efforts, will form the future of innovation, up from just 51 percent who said the same in our 2013 survey. Similarly, more than two thirds of respondents say that they are adopting more collaborative business models presumably to improve growth and leverage investments.

Integrate Advanced Technology
Technology is also coming into play as manufacturers look to squeeze more out of their investments, and new technologies are also making their mark. Consider, for example, the fact that more than eight in ten respondents in the KPMG GMO say that 3D printers are already impacting their productivity.

3D printing (or ‘additive manufacturing’) isn’t just a new type of technology; it’s a potential business model disruptor and market-maker. The cost and efficiency benefits are clear – the ability to produce small-lot or highly customized parts in an ‘on-demand’ setting will no doubt be revolutionary for manufacturers. As the data shows, manufacturers across sectors and geographies agree that the impact of 3D can’t be ignored.

But turning 3D printing into sustainable competitive advantage will require manufacturers to rethink their value chain and revise their existing strategies to understand how 3D will impact their business models over the long-term. So while 3D printers may not mean the immediate dissolution of the traditional manufacturing business model over the short-term, management may want to consider how they might start integrating additive manufacturing into their existing supply chain in order to build up their capability and exploit rapidly emerging opportunities.

Integrating the Supply Chain
Ask a manufacturer to identify their biggest supply chain challenge and you’ll more than likely hear the word visibility. But to achieve greater visibility, organizations will need to improve the integration of their supply chain.

Our survey 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 (40 percent versus 20 percent in 2013).

While the value associated with increased visibility is certainly alluring to manufacturers, many have stalled simply because they lack either the skills or the capacity. Given that most organizations have traditionally been very focused on optimizing within their walls rather than outside of them, achieving the necessary change in skills and capacity will be a lingering problem. This is not to say that visibility hasn’t improved significantly.

According to our 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 three quarters 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 percent) 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.’

You simply can’t build the type of relationship you need to share real-time data without trust. Yet while there will always be an overarching issue of trust when suppliers feel they are being measured and evaluated based on their real-time data, it is encouraging to see that suppliers and manufacturers are moving forward with setting the stage for real-time information sharing.

At the same time, technology is also being leveraged to improve visibility and supply chain integration. Manufacturers must remember that these technologies are more of a foundation for improving visibility and integration. The magic really happens when they are coupled with the right visibility or collaboration technologies to drive serious value from the data the other systems are capturing.

Moving toward a globally integrated supply network is of paramount importance for this sector. We believe there is still much work to be done around trusted relationships, transparency, and technology enablement to foster these types of collaborative business models.

The pervasive pressure of an accelerating pace of change is one of many indications that `Disruptive Complexity’ is here to stay. What is also quite clear is that great opportunities await those companies willing to envision and embrace this complex but opportunity-rich environment.

H. Jeffrey Dobbs is the Global Chair of KPMG’s Industrial Manufacturing practice, which includes Automotive, Aerospace & Defense, Engineering & Industrial Products and Conglomerates. In this role he is responsible for building the KPMG brand in the sector through the creation of leading industry services, thought leadership and go to market strategies to support the largest industrial manufacturers in the world. He can be reached at jdobbs@kpmg.com.

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