Lean Business Specialists - Nestadt Consulting

The Future of Manufacturing in the New Supply Chain

by Kevin Nestadt

There is much doom and gloom around about the future of manufacturing in Australia. Typical reasoning is that market globalisation, coupled with cheap labour in developing countries, will see manufacturers increasingly direct their attentions off-shore. In fact, there has been a trend along these lines for some time, particularly amongst multinationals keen to implement global strategies.

This reasoning has a flaw however, which is indicated by both old and new factors. One old, well established factor is that underlying business strength is correlated to reducing inventory. Richard Schonberger, in his book "World Class Manufacturing: The Next Decade", illustrates a clear correlation between increasing inventory turns and increasing productivity since 1975.

The newer factor is the trend towards 'mass-customisation' whereby the end user of a product will increasingly demand the ability to 'design their own product'. The growth of the internet has provided the perfect tool for companies wishing to take advantage of this trend.

Of course both reducing inventory and mass-customisation demand flexible manufacturing and assembly and proximity to the end customer. Also needed is close communication between manufacturer and customer with minimal 'interference' by intermediaries.

Will the internet allow manufacturers to connect directly to customers and eliminate non-value adding intermediaries, providing instant choice and increasing opportunities for fast inventory turnover?

Well, they already are. A very good, current example of this approach is personal computer manufacturer Dell. Dell allows customers to "design" their product on-line. They then bring in low cost commodity components from overseas and assemble locally to meet individual orders. There is no inventory at any point in the local supply chain, no intermediate activity by distributors and minimal overheads in the way of retail floor space.

Could there in fact be a mini renaissance in manufacturing as some redundant intermediaries' margins are redistributed - partly to customers getting better deals, but also back to manufacturers competing for every last cent? Factory outlets, under any guise, pose a serious threat to traditional retailers.

Where is the maximum value being added in this faster, shorter supply chain? It is not at the retailer, where margins have been traditionally high for high value products. Nor does it lie in the electronic interface (website, ISP, etc.) which is increasingly becoming a commodity item itself.

Much value is added in product design (as has always been the case), however we would argue that maximum value will return to the capable manufacturer of the final product - the organisation with the knowledge and capability to build customised products to order, in short time frames and with minimal inventory.

An example here is contract manufacturing - already popular in the electronics industry - where contract manufacturers can enjoy economies of scale leaving traditional OEMs to focus solely on design and marketing.

The supply chain offers new opportunities for manufacturers to control this value. Manufacturers need to tighten their links with customers through traditional methods and newer bolt-on internet capabilities. This will support better customisation to the customer's requirements if also coupled to a flexible and competitive manufacturing capability.

The internet however is not a panacea for manufacturing. Increasing inventory turns, reducing lead times and removing waste have been long identified as keys to profitability in manufacturing.

There has been an increasing sense in western countries, however, that "no matter how efficient or lean we become, we cannot compete with the developing world due to their inherently low costs - particularly labour".

Labour is not the only issue. 'Next level' resources such as management, knowledge, automation, access to complex materials, as well as access to markets and efficient distribution are increasingly critical to success.

Australia has many of these 'next level' resources, and the labour cost advantage will be reduced in significance as superior flexibility and proximity issues become more relevant - but only for those businesses who operate at 'best practice' levels with minimal inventory and lead time.

(c) Nestadt Consulting 2001