Manufacturers face operational and recruiting challenges that are leading to localised supply chains, investment in energy-efficient processes and new-worker training initiatives, according to research by the World Economic Forum.
Free trade and digitisation have fundamentally reshaped supply chains over the past 30 years, according to “The Future of Manufacturing: Opportunities to Drive Economic Growth.” But the report says the disaggregated supply chains of today are not likely to carry manufacturers through the next several decades. The report uses the term “disaggregated” to refer to the separation and splitting apart of the manufacturing value chain into different locations or countries
Manufacturers also face rising materials and energy costs, and a worldwide talent shortage with 10 million jobs unfilled in the sector across the globe that is unlikely to abate, according to the World Economic Forum report, which was issued in April in collaboration with Deloitte Touche Tohmatsu.
“Increasingly there will be pressure. . .to localise the entire manufacturing ecosystem as close to the consumer as possible,” Craig Giffi, chairman of the Global Manufacturing Industry practice of Deloitte Touch Tohmatsu, said in a telephone interview.
Many emerging economies have been popular destinations for operations of multinational organisations because of low labour costs, and they are manufacturing increasingly advanced products, the report says. But now labour costs in some emerging markets are rising, creating an opportunity and a problem for multinational manufacturers.
With increased wages, workers in markets such as China and India possess more buying power as members of growing middle classes that open new bases of consumers for manufacturers. At the same time, the escalation in wages eats into profitability, diminishing one of the main reasons many multinational manufacturers locate operations there in the first place.
That’s just one of three significant challenges multinational companies’ supply chains face in the global economy. The others: protectionist politics and barriers to free trade, and foreign currency fluctuations.
These factors are driving more localised manufacturing supply chains, the report says, as the opportunity to serve new markets grows and powerful new competitors emerge to fill the demand for goods.
“The companies that are going to get out and get a lead are the ones that are going to really design and develop specifically for those markets, as opposed to trying to make do with a product that works for the guy in Michigan, or out in Ohio and say that’s going to work in central China,” Giffi said. “. . . Increasingly what we’re seeing is the winners are the ones that are there, designing for that population, innovating for their needs and solving their problems, coming up with unique products.”
Rise of disaggregation
The varied origins of components of the Boeing 787 Dreamliner illustrate how disaggregation has become a significant part of the manufacturing landscape, the report explains
Components of the wings alone include tips and flap support fairings manufactured in Korea, fixed trailing edges and main wing pieces from Japan and moveable trailing edges from Australia. A total of 287 suppliers from 22 countries supply components for the giant jet.
Even a small device such as the iPod is manufactured with components from Japan, South Korea, the US and Taiwan, as Apple minimises its costs through global sourcing, the report says. But in addition to increased labour costs, the report says, protectionist public policies – sometimes associated with public health or environmental concerns – are becoming complex obstacles to supply chains. Spreading production across the globe also leaves companies exposed to foreign exchange rate fluctuations, which result in significant cost swings.
Some companies are reducing labour costs in Asia with increased automation, the report says, and some are looking to Africa as the next source of low-cost labour.
Other factors are forcing manufacturers to reconsider where workers will be located. With energy, transportation and inventory costs rising, the report says, a more localised model of production is on the rise.
More than one-third of US-based manufacturing executives at companies with sales greater than $1 billion said they plan to bring – or are considering bringing – production back to the US from China, according to a Boston Consulting Group poll last month.
Localised production in emerging economies can help meet the growing demand for products there. Meanwhile, companies that previously moved production from the US and Europe are returning to enthusiastic welcomes in locations struggling with high unemployment.
Otis Elevator last year announced a major operations relocation to Florence, S.C., from Nogales, Mexico. GE recently moved some appliance manufacturing from China to Louisville, Ky. And US President Barack Obama visited Master Lock in February, celebrating a move that brought jobs back to Milwaukee, Wis., from China.
Nonetheless, Giffi said, technology advances mean that the jobs that return are more sophisticated than the ones that were lost. He said jobs also won’t return to the US in nearly the numbers that were lost.
“We’re getting a lot of headlines. . .but it’s certainly not going to turn the tide on the 5 million jobs that have been lost,” Giffi said. “That’s not the kind of reshoring we’re going to see. We’re going to see things at the margin.”
The demand for goods in emerging markets will increase competition for natural resources.
Elements used to make high-tech products such as wind turbines, solar energy and electric cars are in high demand, according to the report. So are lithium, cobalt, gallium, indium and tellurium, which are expensive to extract from the earth. Even helium, used to cool powerful magnets in medical MRI machines whose scans expose serious ailments to doctors, is experiencing a global shortage.
Countries and companies are reacting to scarcity and rising prices of materials by stockpiling and hedging, the report says. But the long-term solutions include discoveries of alternative elements, materials science breakthroughs and more efficient use of materials. This includes energy, as many companies are investing in efficient equipment and construction to combat rising prices.
“An approach to solving your energy needs and meeting the energy demand with a low-cost, sustainable source of energy is going to be critical,” Giffi said. “It will be a differentiator between winners and losers, both for nations and for companies, particularly the ones that are high energy users.”
But scarcity of human resources may be more difficult to manage. About 10 million manufacturing jobs across the world cannot be filled today because labour does not possess sufficient skills, the report says.
The 2010 Global Manufacturing Competitiveness Index, based on a survey of more than 400 CEOs worldwide plus additional interviews, rated talent-driven innovation as the most important factor in manufacturing competitiveness. But the talent shortage isn’t likely to abate in the near future, the report says, and an aging global population could make the problem worse. Companies and countries that can attract the top scientists, engineers, researchers and production workers can get ahead of the competition.
Collaboration between businesses, academia and private organisations is essential in addressing this problem, the report says. The Washington-based Manufacturing Institute, which describes itself as a think tank and “solutions centre”, created a Manufacturing Skills Certificate System in the US to help high schools and community colleges train students to join the manufacturing workforce, according to the report. In India, IT outsourcing company Satyam responded to concerns about the skills of domestic graduates with an in-house training programme, which now trains 600 to 800 engineers yearly in collaboration with three Indian educational institutes.
Giffi said CEOs are finding that they need to hire people with good work habits, and then do additional training after hiring. Companies have had success recruiting returning armed forces veterans in that capacity, Giffi said.
Manufacturers, Giffi said, don’t believe school systems are going to respond quickly enough to provide skilled workers for manufacturing.
“[Companies] can create the employees they need over a period of time,” Giffi said. “But it’s a costly situation. It takes more investment than if you can hire them, job-ready, out of the population. What they’re finding is, it’s getting harder to go do that. The very skilled workers are employed. And what you’re looking for is good raw material talent.” Innovative ideas, products and services hold the key to successful manufacturing regardless of whether supply chains are localised or disaggregated. But to flourish, the report says, companies and countries will have to find ways to develop and maintain the workforce needed to deliver those products and services.
—Ken Tysiac (firstname.lastname@example.org) is a CGMA Magazine senior editor.