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Imagine
what it must have been like when someone threw the first pass
in football. Before that everyone played football the same
way, grinding out yardage through toughness and brute force on
the ground. It was no coincidence that teeth were probably a
rarity among old time football players. The skill and finesse
required by the forward pass changed the game forever. Those
that tried to play the new game with the old rules got
hammered.
Industry Week/Manufacturing Performance
Institute’s 2003 Census of Manufacturing contained some
unsettling statistics on American Manufacturers. It rated
almost 1000 companies last year across all industries on a
variety of areas including growth, employment, IT spending,
cost of goods as a percentage of sales, and revenue per
employee. Good information to know as you try to answer the
ongoing question, “How am I doing?” Not so good, according
to Patricia Panchak, editor of Industry Week, who says
indications are that senior management is failing to
lead.
Some areas the survey covered provide more detail
on this. The median return on invested capital is 13%, the
average inventory turns is 8, the most popular manufacturing
initiative is lean (35%) closely followed by TQM (14%), Cost
of Sales (COS) averages 70% of revenue, and labor averages 20%
of the median COS.
But, let’s dig a little deeper.
71% of the companies said they had a manufacturing initiative
(there’s no clue what the other 29% are doing) yet the
average reduction in COS as a result of their initiatives was
less than 7%. While the survey doesn’t indicate how long it
took to achieve this reduction, the average revenue gain for
2003 was zero, with nearly 14% of the respondents seeing their
revenue drop by 11% or more. If you assume that revenue drops
were caused by price reductions, in a number of cases savings
from COS reductions didn’t offset price decreases.
Digging
still deeper, the survey reveals the top two concerns of
manufacturers are 1) pricing pressure from customers and 2)
foreign competition. Yet 81% had made either no or little
progress in supplier integration and over 80% were no further
along integrating with their customers. Instead, over 73% of
the companies felt the government was doing an “abysmal or
poor” job protecting American manufacturing
interests.
Folks, the game has changed. American
manufacturers no longer enjoy a quality advantage (remember
when “Made in China” had the same ring as “Made in
Japan” did 30 years ago.) American manufacturers no longer
have a clear productivity advantage; management or technical
skills advantage; or cost advantage. It’s not the
government’s fault, it’s ours. Domestic manufacturers’
only advantage is proximity to the largest market in the
world.
In a lot of cases outsourcing makes sense, both
financially and strategically, as long as it allows a company
to leverage core differentiators. However, it’s proving too
easy for management to move jobs overseas to save on labor.
Meanwhile inventory turns remain low and the COS improvements
are barely keeping up with price decreases demanded by
customers. In some cases, outsourcing may even dilute a
business’s ability to use speed-to-market and customer
responsiveness as differentiators. When that happens, it opens
the door for foreign competition to take even more market
share.
Increasing ROIC and sustaining those increases
over the long term are primary challenges of senior
management. It can be done if customers and suppliers are
integrated to form a synchronized, competitive supply chain
focused on supplying customers what they want, when they want
it. Increasing the speed of transactions and reducing the
amount of inventory can have a great impact on ROIC too. Using
a synchronized supply chain might mean being able to do it at
a price the customer is willing to pay and still make a
profit.
It’s a new game. Play with new rules: A fully
integrated supply chain with synchronized Lean processes.
You’ll be a winner.
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