July 2010

Channel Chat

New manufacturing strategies

By Jim Pinto

Productivity has now become a global race, a fierce, head-to-head competition between regions and nations for the single reason that it is the source of the wealth, the key to improvements in living standards. Those who can make things cheaper, faster, better win!

Today's markets are consumption limited, not production limited. Manufacturers must focus not on producing high-volume low-cost commodities, but rather on becoming innovators and specialists in new types of high-value products. A set of coordinated objectives must be developed to secure sustainable advantage over global competitors.

The China challenge

China has cheap labor, low cost of capital, and improving capabilities in the areas of quality and technology. It accepts much lower profit margins and delivers products for prices that are perhaps 30% lower. The result is, when it comes to high-volume production of standard products, Chinese manufacturers cannot be beaten on price.

How can American manufacturing firms compete? What can smaller U.S. suppliers do when their large domestic customers are moving production and assembly operations offshore to lower costs? They must identify values that offer clear advantages.

The Chinese are still following the old-style low-cost, high-volume production model. But, by that same token, they really do not wish to compete for low-volume and high-variability business. This is the key to their vulnerability.

Fast response

Study existing and prospective customers. Which companies can really afford long lead times? If quick delivery is part of their own competitive advantage, they will have difficulty making a switch to Chinese high-volume sourcing.

The trend over the last several years has been for companies to manage their inventories very tightly to keep costs down. If there is any unpredictability in demand, it is difficult to rely on suppliers that will take months to respond to their needs. The ability to provide fast delivery of a wide variety of products presents opportunities for offering significant value beyond commodity pricing.

Customization

Conventional wisdom demands that the route to achieving reduced manufacturing costs is to focus on a limited range of products and install automation for high-volume production. But that logic is reversing; many customers are demanding more variety and product customization, rather than less.

Today, the ability to modify production quickly needs to be maximized, to offer customization, modifications, and rapid improvements in response to market demands. Target customers are those that have this need and will pay more for ability to provide fast turn-around on quick modifications and improvements.

All employees should recognize quick turnaround represents your company's strengths, and customer change-requests should be welcomed as a compliment to the company's ability to accommodate them.

Look for customers that view your company as a valuable partner in their product development and design process. In the interest of cost cutting, some customers may have cut back in areas crucial for product development. Seek to develop process capabilities and areas of technological expertise that fill these gaps. Once you feel you have the potential to take over these activities on behalf of your customers, change your sales pitch to convince your customer that you have additional ways to contribute to their long-term success. Develop a sense of partnership as an antidote to low-ball pricing.

Many automation companies have gone from simply producing and selling products to providing more complex services that address the usage and total life cycle of the product. They develop smart, connected products designed to increase their customers' productivity and capture valuable data. The key to creating smart products is to not only capture customer information, but also use it to adapt products and services to more precisely meet customers' unmet needs. Products that interact across open platforms provide new business opportunities and solutions that may be more valuable to the customer than the product itself.

Global reach

Many small companies derive a majority of their revenue in their home region. But those that generate a significant portion-more than 50%-through export are in a much better position to withstand regional and cyclical downturns. In addition to protecting against economic cycles, global sales can be a good source of growth in flat domestic markets. Emerging foreign markets can increase your sales dramatically, providing sustained growth and success.

Gone are the days when companies could focus strictly on producing standard products in high-volume at low-cost with big backlogs. China and other offshore producers can do that at lower cost because they accept lower profit margins. The U.S. companies that will thrive are those that can leverage three areas-fast response, customization, and global reach.

ABOUT THE AUTHOR

Jim Pinto is an industry analyst and founder of Action Instruments. You can e-mail him at jim@jimpinto.com or view his writings at www.JimPinto.com. Read the Table of Contents of his book, Pinto's Points, at www.jimpinto.com/writings/points.html.