Being Industrious in an Age of Uncertainty, Part 2

Through top-down, across-the-board budget cuts of, say 5 percent or more a year, operational expenses may be trimmed to the bone, but to what end?


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The following capabilities stand out as the most essential for industrial companies to develop and align. 

Cost Fitness

For many years, industrial companies have focused on cost cutting — some times to the detriment of their businesses. Through top-down, across-the-board budget cuts of, say 5 percent or more a year, operational expenses may be trimmed to the bone, but to what end? Are strategically critical activities axed too deeply because they are lumped together with more wasteful overhead items that actually deserve to be slashed by 50 percent?

A more logical approach is what we call cost fitness: This involves analyzing costs separately by activity, diligently determining which business operations are directly responsible for meeting the company's strategic goals, and supporting those operations with adequate budgets. There are two areas in industrial firms that have generally been victims of cost cutting in the past that deserve reassessment in light of their potential contribution to improving a firm's performance:

1. Supply Chains

Decades of relentless focus on cost cutting have left industrial supply chains vulnerable to disruptions like the earthquake and subsequent tsunami in Japan, and the floods in Thailand this past year. Severe material shortages occurred primarily because Japanese, European and American manufacturers had not diversified their supply base sufficiently to have a backup when their Japanese suppliers were forced to cease production.

More than ever before, we recommend that you reevaluate your supply chain, plan better for geopolitical risks, have multiple sources for critical products and adequate backups for less essential items, and not focus solely on cutting costs. 

In doing this, manufacturers should also reconsider their outsourcing/insourcing strategies. Certainly, factory capacity provided by third parties has gotten cheaper over the last few years, but China is increasingly not the best option if low wages are the key criterion. Places like Vietnam and Thailand may be better choices. Indeed, the Chinese government recently released a plan to raise the minimum-wage rates for manufacturing employees by 13 percent in the next five years. 

But equally important, outsourcing should be assessed through a holistic lens — that is, the decision should not be based solely on the price of labor, but also on critical elements like logistics, risk, quality, scheduling and customer preferences.

For example, when customers in developed countries are willing to pay for advanced service levels or top-quality output, industrial companies are increasingly manufacturing products in their own factories in higher-cost regions, where they can also take advantage of skilled labor, modern infrastructure, the ability to drive innovation with world-class research and development, and capabilities like new manufacturing technologies or innovative lean production systems. 

2. Information Technology

In the industrial sector, information technology (IT) has typically been viewed as a cost to be managed and minimized. But that's not viable anymore as companies must begin to look at IT as a capability, and not purely an ancillary or support function. For one thing, in focusing on becoming more efficient, industrial companies should realize that significant structural cost is tied up in legacy processes — processes that often vary from business unit to business unit. Consequently, standardization of business processes and consolidation of IT systems around a common enterprise solution are more and more critical.

In the past, these efforts have produced only mixed success. But what appears to be different now in companies that have undertaken IT-enabled business transformations is the degree of broad senior leadership engagement. Top managers outside IT are taking lead roles in ensuring that the future-state operating model, processes, and execution road map for systems-driven transformation programs are aligned with the company's overall strategy and capability development goals.

More strategic development of IT can foster a greater focus on digitization of the value chain using technology to provide a deeper level of integration with suppliers, customers and employees. 

Winning the Talent War

Despite high unemployment rates in developed countries, the supply of skilled workers who can engineer, design, sell and service industrial products is meager at best. In the U.S., the unemployment rate for people with a four-year college degree (or higher) is 4.3 percent.

Consequently, it's critical for industrial firms to make their jobs more attractive to smarter and younger workers by, for example, offering more collaborative workplace experiences that engage workers and give them opportunity to continuously improve and seek productivity gains, or by targeting jobs to specific demographic group preferences (studies have found that members of Generation Y want more time off and are less concerned about money, for instance).

In addition, manufacturers should proactively seek talented employees by participating in campus recruitment events and industry job fairs, increasing the number of college internships, forming partnerships with local colleges and universities to identify and sponsor talent, inviting students of all ages on factory tours to show that manufacturing can be a rewarding career, and partnering with other manufacturers to jointly support specialized training programs or attend faraway recruitment events. 

Developing the BRIC Markets 

The Brazil, Russia, India and China (BRIC) economies may be slowing a bit, with less than 7 percent GDP growth forecast through the end of 2012, but for many industrial companies, they represent the best opportunities for growth. Still, making a substantial profit in those countries is not easy. Overcoming the impediments to profitability — which can include navigating local rules, regulations and cultural differences; competing with government-favored domestic companies; recruiting sufficiently skilled workers; and overcoming inchoate infrastructure and logistics networks — requires building a globally effective organization and operating model with more dispersed governance structures and decision-making than has been typical of industrial multinationals in the past.

Manufacturers should focus on acquiring, managing, and sustaining an increasingly global and diverse talent base across multiple geographies; building practical mechanisms to support global collaboration; and driving a cost and process structure that is lean and flexible.

We hope that this letter stimulates your thinking about the capabilities your organization should develop or strengthen to compete in a period of uncertainty. We would welcome the opportunity to hear your thoughts about the year ahead and to discuss how you may create a more prosperous 2012.

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