Resiliency: Manufacturers Must Maintain Focus on Core Concepts Despite Rapid Change

The fast pace of change in manufacturing today causes many challenges. An organization must stay focused on its ultimate goals and resistant to bombarding distractions and temptations to stray into non-profitable diversions. Standardization is important, without restricting innovation and creative problem solving.

November 2014, IDC Manufacturing Insights #IDCEB13W EXECUTIVE BRIEF Improving Business Growth by Achieving Resiliency Sponsored by: Infor Lorenzo Veronesi November 2014 IN THIS IDC EXECUTIVE BRIEF In a world of exploding market complexity, being relevant to customers by providing the best possible customer experience and service is indispensable in growing the business. In practical terms, this means companies have to become more agile and responsive to customer needs. To do this, companies increasingly need to delegate strategic business decisions to those at the edge of the organization, the lines of business — the people that manage the customer fulfillment process on a daily basis by listening to customer requirements and running the necessary operations. The key question here is how to manage the disparate information sources from the different lines of business to ensure that the corporate business strategy is still executed in a consistent way. This IDC Manufacturing Insights Executive Brief explores the role of IT in enabling companies to achieve resiliency — defined as the ability to adapt to business contingencies without losing focus on core business targets — and provides practical examples and guidance for end users. SITUATION OVERVIEW Looking for Profitable Growth Over the last seven years, leading manufacturers have worked hard to survive the worst crisis in 80 years. Companies have restructured their businesses to create more global organizations while cutting costs and unprofitable branches, creating leaner, more efficient process-driven organizations, and innovating their product ranges. In many ways, manufacturers are stronger now than they ever have been. They have invested carefully and generally have more cash available, making them more resilient to the uncertainties of the financial market and better equipped to tackle the challenges they face. They have learned how to survive and prosper, and are eager to compete globally. However, they still have to contend with difficult economic conditions. This is particularly the case for engineering-driven industries such as automotive, aerospace and defense, and industrial machinery and equipment (IME). A recent IDC Manufacturing Insights survey shows that while more than half the respondents from European engineering-oriented companies have a positive outlook on their business perspectives, a little over 39% of respondents are less positive. ©2014 IDC Manufacturing Insights #IDCEB13W 2 This is due to a number of factors such as:  Lower customer spending. Business and consumer customers are trying to postpone the purchase of new equipment, preferring the lower risks connected with services and the advantages of keeping physical assets low.  Fiercer competition. Global competition in manufacturing is heating up, as is the race for market share. Organizations from developed countries are busy implementing their expansion strategies, focused on making the most of the opportunities offered by emerging markets. At the same time manufacturers in developing economies are aggressively gaining local market share, where the bulk of demand still resides. In this context of growing competition from and for new markets, companies are striving to become increasingly relevant to satisfy demanding customers by providing the best possible customer experience. To do so, manufacturers are seeking to deliver in the following three key areas:  Speed. Speed is essential to provide customers with the best service. In our conversations with end users, we see increasing numbers of companies starting to evaluate their investments based on how much time they will save rather than on how much money.  Reliability. Quality remains essential for any successful company. The real gap today is that quality evaluation processes are still siloed — and what typically happens is that once a problem is resolved, it is difficult for organizations to avoid this happening again in the future, maybe in another department.  Innovation. The third capability will be to exploit the latest innovation trends that no longer come from single R&D departments but typically happen on a cross-industry basis. In particular this entails co-innovating with customers, by sharing concepts and embedding the feedback loop from customer relationship management (CRM) activities within the product innovation process. Toward Demand-Oriented Supply Chains Companies must provide superior responsiveness and outstanding reliability in meeting fulfillment needs to ensure customer loyalty and to stay ahead of competitors. Manufacturers realize that line- of-business resources must be aligned to customer requirements and processes calibrated to the customer. In particular, the demand-oriented value chain will need to be:  Dynamic and cost-effective, enabling supply chains to be quickly reconfigured depending on volumes and the geographic source of that demand. This includes taking fixed costs out of the network, so that the supply chain can operate profitably whatever the demand level. This means assets and structures need to be adaptable — maintaining a lean cost structure from an asset and workforce standpoint means assets are run at optimal conditions but can also flexibly scale up or down without fundamentally changing the overhead cost structure.  Service-centric and embedded with customer understanding. Companies are looking to provide a multichannel continuous experience for customers to access and consume their products. To reach the highest level of customer engagement in value chains, manufacturers will need to collect data in real time from their logistics networks. Manufacturers are increasingly relying on suppliers and downstream data, reseller and distributor data, supplier/customer inventories, supply chain partner forecasts, and sensor data (including M2M, RFID, and barcodes). Many manufacturers have worked hard over the past few years to become more demand-oriented. Customer fulfillment initiatives have consistently been a top priority for manufacturers over the past ©2014 IDC Manufacturing Insights #IDCEB13W 3 few years, according to ongoing IDC research, according to ongoing IDC research, but there is still work to be done across all lines of business. Maintaining the highest possible customer service level is a target made all the more elusive by the number of challenges triggered by the increasing complexity of value chains. In addition to the elongated and multitiered nature of supply and service networks, supply chain complexity is often mainly attributed to the number of products and product configurations that a manufacturer must manage and to the long delivery times that result from the extensive use of offshore manufacturing. Manufacturers have to struggle with the reality that today's organizational structures are still not able to keep pace with business and enable the required real-time decision- making environment. Despite great efforts here in the past, manufacturers' business results are still affected by organizational silos, poor and inflexible business processes, and poorly articulated IT architectures. In a recent worldwide IDC survey, respondents said they believe this IT complexity is generated by "ineffective or inadequate IT systems," "information stored in too many different IT systems that aren't properly integrated," "a multitude of best-of-breed or bespoke systems," and "old technologies that are difficult to use." IT complexity is the single most critical barrier to mastering business complexity (see the IDC White Paper In Pursuit of Operational Excellence: Accelerating Business Change Through Next-Generation ERP, IDC #IDCWP47T). It's exactly these types of factors that combine to slow down companies' reaction to the business challenges in the modern world. The Challenges of New Organizational Structures Engineering-oriented manufacturers are going through significant organizational transformation as they realize they need to be able to effectively delegate important decisions to line-of-business people at the edge of the organization to make the right customer connections. This is confirmed by our ongoing conversations with manufacturers that say while efficiency will continue to be important, too much centralized standardization in business processes risks diverting attention away from the essential capability of dynamically fulfilling customers. The risk here, however, is that having too many individual decision makers can weaken the company's core strategy. In most cases, poor visibility of downstream processes or lack of understanding of the strategic, business-level goals achievable with decisions made in the proper context can lead to broader problems. Even the best decisions — when considered within a specific business unit, geography, or subject matter — may ultimately threaten the ability of a downstream group to achieve its targets and may negatively impact them. This can be exacerbated by the number of people and business functions involved in the decision- making process (see Figure 1). ©2014 IDC Manufacturing Insights #IDCEB13W 4 FIGURE 1 Collaboration Difficulty Explodes as Participants, Tools, and Data Increase Source: IDC Manufacturing Insights, 2014 This complexity can prevent a manufacturer from accessing information when it's needed, and the lack of visibility can make it more difficult to pinpoint anomalies or problems in the supply chain and manufacturing processes that require attention, resulting in delays or higher costs when it comes to fulfilling customer requests. Although much has been done by companies to set up more efficient information channels along value chains, the amount of information being exchanged has exploded dramatically, making the need for better systems a never-ending task. Achieving Resiliency Some "organizations" can balance a devolved decision environment with solid strategy execution, but these “organizations” are found in the natural world and not in business — a swarm of bees, for example, or a flock of birds, or a school of fish. These "organizations" are resilient by nature, and have edges that continuously evolve without affecting the main target of the group, such as the migration destination. Scientists consider a system resilient by its ability to "adapt to changing circumstances while maintaining its central purpose." When it comes to business, resiliency can be defined as an organization's ability to adapt to business contingencies without losing focus on core business targets. To do so, companies need to become "simple at the core and diverse at the edges" — that means balancing the obvious need for process standardization and efficiency with the flexibility required from LoBs from every unit in their day-to-day activities. Within Function Cross Function Suppliers End Clients D if fi c u lt y o f c o lla b o ra ti o n ©2014 IDC Manufacturing Insights #IDCEB13W 5 The ability to identify a problem and isolate the root causes upfront, to understand the effect of early decisions on the customer experience, and to enable corrective action as quickly as possible will be essential to:  Capture and validate decisions upfront to ensure a more complete impact assessment and to make decisions sooner with a higher level of confidence  Accelerate business processes and approval cycles to reduce time to market and lower costs  Improve total life-cycle quality, costs, and customer satisfaction, which in turn enhances brand image and market position  Improve speed and accuracy of decision making, especially in processes that currently lack reliable or accurate information or are reactionary and created under time pressure The Role of IT To achieve resiliency and avoid complications along the value chain, rapid access to and sharing of data — regardless of source, format, or location — is essential. Manufacturers need to consolidate heterogeneous data into actionable information and deliver it to the most relevant person in an intuitive and consumable format through appropriate devices. Going beyond mere traditional business applications, manufacturers will need to equip their workforce with an enhanced IT platform that creates visibility and offers real-time insights into product- and service-related information along the entire life cycle. This will provide consistent processes, informed staff, and open lines of communication along the value chain. Companies need to provide their employees with a real-time, collaborative decision- making environment that puts in-context, timely information in the hands of everyone who might need it, at that particular time. As such it is critical to be able to share information that is typically distributed and scattered across a number of systems and datawarehouses with the organization's decision makers to enable them to achieve real-time monitoring of business performance. Not surprisingly, IDC research shows that the key driver for manufacturers investing in new value chain applications is improved visibility, closely followed by risk control and improving responsiveness (see Figure 2). All three rank higher than cost control (65.4% of business leaders rank value chain visibility as "very important" and 54.8% rank it higher than simply cost control), and this is a major change in perspective for manufacturers. ©2014 IDC Manufacturing Insights #IDCEB13W 6 FIGURE 2 Key Drivers to Value Chain Investments Q. What are the key business drivers that have led or are leading your company to invest in value chain management IT applications? Source: IDC Manufacturing Insights, 2014 The Convergence Between IT, OT, and CT Given this need to empower LoB decision makers, it is not surprising that many more IT initiatives are being delivered to directly support the operational sides of the organization. IDC Manufacturing Insights' recent research shows that the value of LoB-driven IT initiatives is currently about half of total IT spending and in three years could increase to as much as 80%. At the same time, LoB employees expect much more of the IT systems they are going to use — they need to be very easy, very intuitive, and similar to what they are familiar with already. In this sense, we are seeing a strong convergence between traditional IT, operational technologies (OTs), and consumer technologies (CTs). What IDC defines as 3rd Platform technologies (social, mobile, Big Data/analytics, cloud) are coming together to create a series of initiatives that deliver a platform to enable organizations to become more resilient. Manufacturers will start leveraging the 3rd Platform to deploy a collaborative working environment which will be technology enabled to achieve more openness and agility, and to enable decisions to be made on real-time data. This will provide speed of business transaction, an informed workforce, and open lines of communication across different functions and along the supply chain. The 3rd Platform will enable self-forming teams to identify a problem, isolate the root causes, and take corrective action as quickly as possible. 1 2 3 4 5 Adopt "green" value chain by lowering total carbon footprint Lower total value chain cost Improve overall service performance Improve value chain resilience/risk management Improve value chain responsiveness/reduce lead time Improve value chain visibility ©2014 IDC Manufacturing Insights #IDCEB13W 7 The Importance of Cloud In the past, the manufacturing industry has been quite skeptical when it comes to adopting cloud computing. Many manufacturers were afraid of security threats and disruptions in data availability. Leading manufacturers have invested in cloud-based applications to support their value chain processes as they realize that cloud creates the essential infrastructure to speed up IT implementations, reduce IT costs, and achieve process standardization and integration along the value chain. We see faster deployability to end users as the main driver for investing in cloud applications, followed by ease of sharing information among trading partners (see Figure 3). On top of that, the lower total cost of ownership of cloud solutions will help manufacturers upgrade and replace outdated systems with greater ease, enabling even small and midsize organizations to deploy world-class business applications to stay competitive with larger organizations. FIGURE 3 Key Adoption Drivers of Cloud Technologies Q. What are or what would be the top reasons for you considering cloud computing technologies? Source: IDC Manufacturing Insights, 2014 0% 10% 20% 30% 40% Cloud computing will help us innovate the business Cloud computing can help us increase workprocess ef f iciencies Our company lacks skills and/or headcount in-house to implement and manage a new service We expect to be able to reduce our IT staf f and save money Cloud computing can provide access to latest versions of applications and other sof tware, or improve our application rollout Cloud computing can give us more choice in how we source IT and business services Cloud computing makes it easier to integrate new sites or integrate acquired companies We believe cloud will help us to improve our service levels and business agility Low monthly payments (i.e., no big upfront license payment) Encourages more standard (less heavily customized) IT systems We need new IT services and/or business processes to be implemented quickly and cloud services will help us do that Pay only for what you use (no need to over-provision) Cloud services make sharing systems/information with business partners simpler Easy/fast to deploy to end users ©2014 IDC Manufacturing Insights #IDCEB13W 8 An Example: The Journey of the Industrial Machinery and Equipment Industry Industrial machinery and equipment (IME) companies — producing generators, pumps, valves, elevators, conveyers, forklifts — realize that simply providing the best product quality and reliability doesn't lead to lasting competitive advantage. More companies now believe that the need to retain customers at a time of lower capital spending and higher market volatility is elevating the role of service activities from being a "necessary evil" to being the key revenue driver. This has led IME companies to a complete shift in their strategic focus from product to services:  Services offered on top of purchased items. These are more traditional services that are offered to complete or complement a physical purchased product. They include financing services, warranty management, and spare parts management. Companies therefore need to put better service tools in place, focusing on enabling ubiquitous, on-demand access to detailed, up-to-date product information for improved service technician efficacy and safety.  Product is sold as a service. The equipment manufacturer — instead of selling the physical product — offers it as a service in return for payment of a service fee. In this case, the equipment manufacturer can provide services based on product performance that may include consumable and spare parts management services; outsourced maintenance, repair, and operations (MRO); and remote equipment monitoring. Companies are even identifying and implementing innovative service business models such as "power by the hour," which promote longer-term, performance-based contracts with customers. To capitalize on the services opportunity, however, IME manufacturers need to put in place new — and more resilient — organizational structures, processes, and tools that support services-based business models that significantly differ from traditional industrial equipment business practices. To do so, IME companies have to restructure processes that are often disjointed, and leverage information that is scattered throughout the organization, such as customer and contract information, service work instructions, and part inventories. Take, for example, the aftermarket for spare parts. The perceived value here lies not in the spare part value itself but in the company's ability to deliver the right spare part to the right place at the right time. The variable and unpredictable nature of this type of service can be a significant challenge. Companies must be agile enough to respond to unpredictable low-volume and intermittent demand, fulfill same-day service requirements to support warranty commitments, maintain a customer's uptime, and avoid penalty payments. Also, the aftermarket service must carry, almost by definition, a huge number of parts that have a high risk of obsolescence. These parts are often sold through uniquely structured, multi-echelon, worldwide distribution networks that normally differ from the sales channels of finished products. To enable more resilient and customer-oriented organizations, IME companies need to wipe out layers of complication in their organizations and provide key decision support tools to their LoB leaders to be able to manage their changing business in the most profitable way. Historically, making such a system work was an expensive endeavor, which did not scale well and often failed to deliver a return on investment. However, modern ERP and service management systems, coupled with the proliferation of new IT platforms, in particular pervasive connectivity and mobile platforms, enable service organizations to make better product-related decisions throughout the product life cycle. Also, our recent research shows that many companies in the business have started and will continue to use mobile-enabled cloud-based ERP applications to support their service activities. ©2014 IDC Manufacturing Insights #IDCEB13W 9 ESSENTIAL GUIDANCE IDC Manufacturing Insights offers the following advice to manufacturing enterprises setting out on their journey to become more resilient and agile:  "Culture eats strategy for breakfast." No business transformation is possible if it doesn't fit with company culture. The reality is that in many organizations, most employees do not even have a clear idea about the mission of their company and strategies in place. Therefore, it is essential to have organizations culturally aligned from bottom to top. Otherwise, all business process improvement will be compromised by poor alignment among key decision makers.  Consider an open and modern ERP system as your resiliency backbone. Modernizing IT architectures and business applications used to support new, flexible, customer-driven operating models should continue to be a priority for companies across all industry segments. We believe the ERP application should act as the focal point of this transformation as it is the repository and backbone of most relevant business information.  Multiply small investments by delivering information to multiple users. One of the key benefits from deploying a cloud and mobile-enabled IT architecture is that these technologies allow any user to create, disseminate, and analyze information in a very cost- effective manner. This makes the ROI from applications investments much easier to grasp because once a single piece of information has been generated, its potential audience becomes much wider than by using the traditional desktop/server architectures. About IDC International Data Corporation (IDC) is the premier global provider of market intelligence, advisory services, and events for the information technology, telecommunications and consumer technology markets. IDC helps IT professionals, business executives, and the investment community make fact-based decisions on technology purchases and business strategy. More than 1,100 IDC analysts provide global, regional, and local expertise on technology and industry opportunities and trends in over 110 countries worldwide. For 50 years, IDC has provided strategic insights to help our clients achieve their key business objectives. IDC is a subsidiary of IDG, the world's leading technology media, research, and events company. Global Headquarters 5 Speen Street Framingham, MA 01701 USA 508.988.7900 Twitter: @IDC idc-insights-community.com www.idc.com Copyright Notice This IDC research document was published as part of an IDC continuous intelligence service, providing written research, analyst interactions, telebriefings, and conferences. Visit www.idc.com to learn more about IDC subscription and consulting services. To view a list of IDC offices worldwide, visit www.idc.com/offices. Please contact the IDC Hotline at 800.343.4952, ext. 7988 (or +1.508.988.7988) or sales@idc.com for information on applying the price of this document toward the purchase of an IDC service or for information on additional copies or Web rights. Copyright 2014 IDC. Reproduction is forbidden unless authorized. All rights reserved.
More