Manufacturers expect innovation, collaboration to drive sustained growth


By Ken Tysiac

Manufacturers are optimistic that they can combine product and process innovation with customer and supplier collaboration to create sustained but modest growth in an uncertain world economy.

Three in four senior manufacturing executives are optimistic or very optimistic about the prospects for their businesses over the next 12 to 24 months, according to KPMG’s Global Manufacturing Outlook, which surveyed executives from across the world.

CPAs in manufacturing responding to the AICPA’s Business and Industry Economic Outlook Survey also have maintained optimism about their own companies, at just over 60% in the first quarter of 2012 and just below 60% in the second quarter.

Likewise, accountants in manufacturing were more optimistic than their counterparts in all other sectors in the first quarter CGMA global economic forecast, a survey conducted by the AICPA and CIMA. Sixty-three per cent of accountants in manufacturing were upbeat about the outlook for their organisations, up from 54% the previous quarter.

Despite continued concerns over the European debt crisis, which Global Manufacturing Outlook respondents ranked as the biggest obstacle to global growth, manufacturers are maintaining lean operations and taking advantage of technological improvements to drive growth.

Specifically, manufacturers are targeting profitable growth. Their leading concern is input cost volatility as it was in 2011, and 54% of respondents said exiting unprofitable product lines or geographies – or both – will become more important for them over the next two years.

Manufacturers are decreasing risks by “nearshoring” their supply chains, moving operations closer to their customers, after natural disasters such as the tsunami in Japan that disrupted global supply chains. A recent World Economic Forum report also said manufacturers are increasingly developing localised supply chains in close proximity to their customers.

In other words, manufacturers want to stay as lithe as possible.

Jeff Dobbs, KPMG’s global head of diversified industrials, said in a telephone interview that although growth is important, heads of global manufacturing companies can never take their eyes off the costs.

“If you think back to what’s happened in the last three or four years with the recession, with layoffs, with downsizing, with restructuring, et cetera, those costs have all been taken out, and now people are continuing to have to take more sophisticated looks at how to take costs out,” Dobbs said. “So some of it is around use of less costly input. Some of it really is around automation and technology.”

At the same time, 72% of respondents said transformational innovation has begun or will do so over the next two years. This innovation serves dual purposes, extending and enhancing product lines while cutting costs through process innovation, according to the report.

New industrial software allows engineers to perform virtual prototyping of industrial systems, designing multiple solutions to problems, comparing them and analysing their performance through models to predict which processes will be most effective and efficient, the report says.

The new technology helps engineers adjust factories quickly to accommodate design changes.

Collaboration revolution

Such collaborative links are not limited to software and IT systems inside the factory.

Sixty-one per cent of manufacturers expect greater collaboration with key customers over the next two years, and 60% plan more cooperation with suppliers on initiatives such as product design, according to the KPMG report.

“Collaboration, almost in any aspect of businesses probably used to be an unknown concept,” Dobbs said. “It was tension, and challenge and just kind of fight for every nickel. I think what we’ve seen is, companies have emerged from the recession seeing that you can’t do everything by yourself, and it really starts with the collaboration with the suppliers.”

For example, Greif, a US-based manufacturer of rigid industrial packaging, works with key customers that are forward-thinking in their packaging needs to test new products, the report says.

At the same time, manufacturers are becoming more service-oriented. “Customized solutions” trailed only “new products” in the KPMG survey among features respondents expected customers to find most important over the next two years.

Sixty-three per cent of respondents said that new or enhanced customer services were expected to make a significant or very significant contribution to products in the next two years. This trend toward increased services even has a name – “manuservice”.

Manufacturers hope these collaborative efforts – combined with improved products and processes – will help them weather economic uncertainty and drive growth.

Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.

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