Ultimate Manufacturing

Global competition and downward pricing are no deterrents to manufacturers that are building the capabilities of the future.

by Louisa Wah

Manufacturers have been struggling for years with stagnant pricing, increasing global competition and the pressure to get products out better and faster. Yet the more time they spend reacting to market pressures, the less time they devote to the research and development necessary for innovation, the very seeds of their future survival.

It's a vicious cycle that any manufacturer would want to end, becoming an agile and innovative enterprise that can surf through rough waters and always beat the waves. Today, the leaders in manufacturing are looking to break away from the old-style thinking that their job is simply to make things. They want to excel as customer-centered organizations that develop transparent relationships with customers and suppliers, manage the flow of knowledge among all these parties and turn on a dime in adjusting to market demand. Those that do will provide a model that even companies outside of manufacturing would want to emulate.

How do we define the ideal? There have been efforts in the United States and other industrialized nations to identify the attributes of the next-generation manufacturer. Apparently, we can expect to see a dramatic transformation from the "dirty-job" image of the Industrial Revolution to a pristine operation where the flow of information and knowledge takes precedence over the movement of materials and goods. The majority of manufacturing processes will be "virtual," so to speak, and the manufacturer will become a "knowledge enterprise" heavily reliant on intangible assets within and beyond the factory floor.

Some people surmise that a time will come when manufacturing as a process becomes obsolete and a Star Trek-like replicator can produce everything imaginable. But in today's down-to-earth world, hard goods still need to be produced and human beings still rely on them to meet their needs and improve their standard of living. So you can count on manufacturers to exist for ages until the day of the replicator comes.

Yet to Come

Before we reach the point at which materials are totally out of the picture, what can we expect to see in the next generation of manufacturing?

If we try to extrapolate from current developments in manufacturing practices, the future enterprise will involve as little physical material handling as possible. There won't be any need for trial-and-error experimentation on how to set up the material-flow processes at production cells. Computer simulations of large-scale, complex models of the entire manufacturing logistics process will make the interactions between these processes flawless and smooth.

We will see a clean factory floor--provided it's even called a "factory" anymore--filled with robotic cells and computer operators rather than machine operators, with very few steps involved in the actual fabrication, assembly and packaging of goods. Managers will closely monitor their electronic linkages to the company's customers and suppliers to get the latest data that affect their decisions about product design, manufacturing, shipping and inventory management. They will ensure that the proportion of time spent on the manufacturing processes is as small as possible so that they can remain flexible to customer demands and market shifts. This will greatly reduce the effects of market volatility in a business environment where changes occur at lightning speed.

Trend Watch

To position themselves as manufacturers of the future, companies must equip themselves with a new set of competencies completely different from those their fathers lived by.

Today, many manufacturers single-mindedly focus on operational efficiency, as reflected in jargon such as TQM, JIT, ERM and so forth. Very often, one acronym no sooner soars in popularity than it is replaced by another. None of those concepts is bad per se. But managers can get blindsided by the fad du jour and lose sight of the big picture. In fact, most manufacturers today are bogged down by short-term business decisions and therefore cannot break away from mediocrity.

Paul Gallagher, research associate at the Leaders for Manufacturing (LFM) program at the Massachusetts Institute of Technology, Cambridge, laments, "People don't spend enough time on long-term strategy and looking at the implications of the trends happening."

There are three main global trends that will deeply influence the future of manufacturing enterprises:

• The acceleration of technological change implies that companies must change employees' skills base faster.

• The globalization of markets means companies must have a truly global presence to stay alive. Gallagher projects that a global U.S. enterprise should derive only 15 percent of its revenues from domestic operations, as opposed to today's 40 percent to 60 percent. In light of this, HR should put employees on international tracks much earlier in their careers.

• The increasing demand from customers for social responsibility raises the bar for companies in terms of their environmental and human rights track records and accountability to stakeholders.

The truly smart companies not only pay close attention to these global trends, but also take time to think about their implications for particular business objectives. More importantly, they understand the essence of competition in today's global turf: Creativity and innovation, rather than mere productivity, are the critical elements that will help position them as the world's manufacturing leaders.

In a search for such leaders, Management Review teamed up with Ernst & Young to conduct a survey of AMA members in manufacturing (see page 18). The study identified 13 companies (of 766 respondent firms) that lead the competition in five critical measures of manufacturing: cost efficiencies in operations, speed to market, research and development, rapid supply from suppliers, and first-class delivery logistics.

Based on these and other findings, the survey determined that leaders in manufacturing share the following characteristics:

• An active and deep involvement with customers and suppliers.

• A high degree of product customization.

• A rigorous application of performance measurements to their manufacturing operations.

• Benchmarking beyond their own industry and national border.

• Relatively low worldwide labor costs as a percentage of "costs of goods sold."

Of course, our survey questions deal with existing best practices, which, by their very nature, cannot address innovative practices that are particular to a company or unknown to the rest of the world. But the results do serve as a guide to the primary factors that help form a close-to-ideal manufacturing enterprise. From there, we can look ahead and imagine what the next generation of manufacturing will be like.

Next Generation Characteristics

The ability to respond to customers, cultures and the global market will determine the success of manufacturers in the future, according to the U.S. governmental research groups of LFM, Agility Forum and TEAM (Technologies to Enable Agile Manufacturing). Tomorrow's manufacturers will also need to be flexible in their use of human resources and plants and equipment if they want to remain proactive rather than reactive in adapting to market forces.

How can companies achieve such responsiveness? What follows are the four main areas in which leading manufacturers of the future will excel:

Customer Responsiveness

A company that is responsive to customers delivers what is needed instead of what's ordered. "If you bring in the knowledge of the supplier with the knowledge of the customer, that sharing of knowledge will come up with what's truly needed," Gallagher says. "That takes away some of the volatility in the changes you respond to."

A practical application of this concept is to meet customers' evolving needs and think of solutions they will need in the future. One way to do so is with a "total integration solutions" approach, in which companies design products to meet customers' needs even before they have articulated them. The "Global Star" system devised by General Motors, for example, is an integrated solution that provides emergency help for motorists. Thus, the company is not just selling the automobile product itself, but also the emergency service.

Ultimate responsiveness requires a level of intimacy that creates transparent relationships with all customers along the supply chain. Some leading manufacturers are already using the latest electronic networking and logistics management technologies to achieve this intimacy and gain tremendous knowledge from customers and suppliers throughout the supply chain. Consequently, they can make intelligent decisions that much more closely reflect changes in market demand.

To achieve this new type of intimacy with customers and suppliers, companies must view "teaming" as their core competency. A willingness to share knowledge is key. By forming trusting and informal alliances that are akin to "handshake relationships," manufacturers can respond to customers' needs a lot more quickly.

This approach is particularly important for a distributed manufacturing enterprise--a company at the top of the supply chain that relies on others in the chain for specific fabrication, assembly and testing capabilities. R&D is the core competency of such an enterprise; therefore, intimacy with all partners and customers along the supply chain is crucial to ensuring continuous innovation and competitiveness.

Ideally, the design engineers would be able to develop new or improved products with very few design iterations (trial-and-error stages)--if they are able to get real-time knowledge from the enterprise's customers, its customers' customers and so on. They could then make smart design decisions without having to conduct the multiple trials that result from false predictions of market demand or the resources needed to meet it.

While the current state of manufacturing is far from ideal, exciting developments have been brewing at the Rensselaer Polytechnic Institute in Troy, New York. Its Electronic Agile Manufacturing Research Institute (EAMRI) and about a dozen partners in the semiconductor industry have been researching the "virtual design environment" (VDE) and have developed a prototype for the assembly of circuit boards. Theoretically, this technology can be extended to other industries as well.

Robert J. Graves, project director of EAMRI, says this networked information infrastructure allows product design engineers to obtain knowledge about downstream elements, such as material component costs and manufacturing and assembly cycle times, that help reveal the consequences of their design decisions immediately.

"Frequently the design engineer doesn't have good tools to assess the cost or cycle-time implications of his or her designs, and their training is primarily in electronics," says Graves. "What becomes difficult is when their companies also ask them to create designs that are low cost [and] that get to the marketplace very quickly."

One reason for this lack of responsiveness is that many designers work with centralized tools containing embedded data that will become less accurate over time. A virtual design environment, by contrast, allows them to access distributed models and databases so that they can evaluate the costs and cycle times of their designs. "The net result is that they can produce designs that are both functionally capable and also assure themselves that they have met cost and cycle-time goals," Graves explains.

One result of the research prototype is the collapsing of the circuit board design and manufacturing cycle time from several weeks to only 15 minutes. At the same time, quality, reliability and responsiveness to customer priorities have been enhanced.

Global Market Responsiveness

Globalization may sound like yesterday's news, but many manufacturers have a long way to go in becoming truly global organizations. The manufacturer of the 21st century must make its R&D geographically dispersed to truly reflect the essence of the business, says MIT's Hanson. Many companies that proclaim to be global today still have their R&D at headquarters, but this approach will not suffice if a manufacturer is to be responsive to customers around the world.

Hanson stresses that truly innovative companies tap knowledge from all possible sources. "They will be doing R&D around the world, so they are drawing upon the best minds of folks wherever they may be," he says. This means recognizing the nuances of different cultures and drawing from the expertise of different regions. "[What] makes a product unique is to serve the unique needs of a unique culture."

Ultimately, a foreign company that invests in local R&D capabilities should be perceived as a domestic company in each market, says Gallagher. He believes the idea that the United States is losing jobs to foreigners when companies move operations overseas should be replaced by the thinking that companies are actually creating jobs in a market where they are domestic players. Manufacturers that become truly global will find that employees around the world are just as loyal to the company as U.S. workers are.

Plant and Equipment Responsiveness

Becoming flexible in the use of physical plants and equipment will give a company a supreme competitive edge. Today's manufacturers often find themselves in a bind because they must find a way to fill production capacity when it exceeds demand. But those that have true flexibility in their physical assets need not worry about maximizing capacity, says Gallagher. Instead, they can consider how to minimize their assets to meet the existing level of demand. And when demand is higher, production capacity can be expanded easily to cope with the fluctuation.

How is such flexibility achieved? With assets that are not permanent. These may include leased equipment, and manufacturers must view the ability to manage equipment flexibly as a new competency. Manufacturers' Services Ltd., a producer of durable goods in Concord, Massachusetts, has achieved variable capacity thanks to the practice of leasing equipment. As a result, it can be very flexible in the kinds of orders it takes.

Another form of true flexibility in the fabrication of products will come from toolless processes, says Gallagher. "If you can build things that are exact to size and shape, then maybe you don't need lots of jigs and fixtures to enforce that shape into the product," he says. The process of "soft-tooling," in which the tools that produce a product are configured electronically, will make it much easier to produce different types of goods and improve flexibility. By using software to configure a piece of equipment, for example, a company can develop different shapes for a product, whereas mechanical tools are dedicated to fixed shapes and changing them is costly and time-consuming.

In the future, says Gallagher, manufacturers may be able to build information and shape into a product itself so that it doesn't need an external fixture to create that shape. Already, certain technologies make it nearly possible to replicate three-dimensional objects without human interaction, he says. This technology measures an object with a coordinate-measuring tool and then makes an electronic representation of it--a CAD model that will be used to make the cutting machine that cuts any material into the shape of a final product.

On a larger scale, the use of simulation technology can make the establishment of a plant a lot less rigid and costly. Currently, manufacturers are seeking to use such technology on a local scale to replace certain trial-and-error processes concerning inventory movement and other processes. The integrated use of simulation to model real-life configurations of machinery, production units and their linkage with logistics control systems is not yet widespread.

In the United States, the academic community is taking the lead in this research, working with industrial partners on certain practical aspects of manufacturing processes. Its final goal is to develop sophisticated and extremely accurate simulation technology that can model the entire manufacturing business without having to go to the factory floor.

The manufacturing industry today has little understanding of how different processes in the workflow interact and behave as an aggregate, according to Leon McGinnis, professor of industrial and systems engineering at the Georgia Institute of Technology, one of the faculty team members in charge of the school's Keck Virtual Factory Lab. "We seek to create models and hypotheses of how processes link and behave," he says. "You need a factory to test that, but no one is going to let you go into their factory to test that. So you need to build a virtual factory."

At the Keck Virtual Factory Lab, students and faculty work at a dozen computer workstations dedicated to software modeling. A robotic cell helps them test their ideas about control software. "Our focus is primarily on logistics--the sequencing of movements within the cell, so you avoid deadlocking the robot and get the work done as quickly as you can," McGinnis says.

One of the challenges for this lab and several others in the United States and Singapore is to validate the modeling with reality. The labs need to ensure the final model is realistic when compared to actual processes so that the movement of the machinery and robots will be precise. The accuracy of the details in the simulation will determine whether the actual outcome of the workflow design will be smooth and error-free.

McGinnis and his colleagues are also researching how to use the Internet to facilitate the distributed use of simulation models for decision-making--allowing parties at different locations to execute the same model and see its results before making decisions.

HR Responsiveness

With new skill sets in constant demand, manufacturers that create a flexible workforce will certainly be more agile. And those that want to excel at innovation must have a long-term strategy for the continual re-education and reskilling of their workers, according to MIT's Hanson. "A competitive edge for the developing countries is labor rates; that of developed countries is their ability to innovate and create new products and services," he says.

Counting on the Future

The manufacturing sector is at a critical juncture on the edge of the new millennium. Innovation is no doubt the key to survival in the future, yet manufacturing enterprises are facing pressures from the rapidly changing marketplace that rarely existed even a decade ago. In their quest to counter external forces, many well-established companies are moving farther and farther away from the research and development necessary for innovation.

EAMRI's Graves says, "I am a little bit worried, because I see companies moving increasingly toward the supply-chain orientation and increasingly moving away from the R&D needed. Where is the R&D of the future for manufacturer practices going to occur?"

MIT's Gallagher notes that companies should devote more time to building up their human resources to make continuous innovation possible. Now that manufacturers have mastered productivity, he says, the next step is to apply the same rigor to the creative processes. "We've got lean manufacturing, JIT, TQM, all of which are about productivity. We can transfer that and the developing countries can do it easily. What is it that we, as a developed country, can do that's more valuable, that makes us more competitive? It's the innovation side."