But a global survey of manufacturers conducted by the Economist Intelligence Unit in February and March found that, although a high proportion are affected by the downturn, a surprisingl
Trang 1Sponsored by
A report from the Economist Intelligence Unit
Trang 2© The Economist Intelligence Unit Limited 2009
Manufacturing confidence is an Economist Intelligence Unit briefing paper, sponsored by Siemens
PLM Software The Economist Intelligence Unit bears sole responsibility for this report The Economist Intelligence Unit’s editorial team executed the survey, conducted the interviews and wrote the report The findings and views expressed here do not necessarily reflect the views of the sponsor The research drew on two main initiatives We conducted a global online survey in February-March
2009 In all, 354 executives took part To supplement the survey results, we also conducted in-depth interviews with senior executives and independent experts knowledgeable about manufacturing
Our thanks are due to the following for their time and insights:
l Richard Spitzer, managing director for automotive and industrial equipment, Accenture, USA
l Nils Bjorkman, executive vice-president, responsible for worldwide commercial operations, Tetra Pak, Sweden
l Maurice FitzGerald, head of Strategic Initiatives, Europe, the Middle East and Africa, Hewlett-Packard technology solutions group, Switzerland
l ManMohan Sodhi, professor in operations management, City University London’s Cass Business School, UK
l Erin Dobson, director of corporate responsibility communications, Nike, USA
l Tony Maddaluna, vice-president of global manufacturing, Pfizer, USA
l Frank Bamford, senior vice-president of business development and strategy, GKN Aerospace, UK
l Yossi Sheffi, professor at Massachusetts Institute of Technology and director of MIT’s Centre for Transportation and Logistics, USA
l Scott Anthony, president of Innosight, the consultancy, and author of The Silver Lining:
An Innovation Playbook for Uncertain Times, USA
l Brian Krzanich, vice-president and general manager of manufacturing and supply chain, Intel, USAThe author of the report is Sarah Murray and the editor is Iain Scott Our sincere thanks go to the executives who participated in the survey and interviews for sharing their time and insight
May 2009
Preface
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It is not hard to grasp the difficulties facing manufacturing companies today Newspaper headlines
tell stories of falling orders, plant closings, asset sales and job losses in the thousands
But a global survey of manufacturers conducted by the Economist Intelligence Unit in February and March found that, although a high proportion are affected by the downturn, a surprisingly large number—given the economic gloom—say they are optimistic about prospects for business over the next 12 months
Many express confidence in their ability to retain customers and attract new ones, to expand into new markets and secure a resilient supply chain Others see the slowdown bringing with it opportunities, from hiring talented workers to redesigning products and processes
Whether this optimism is justified may not become evident for some time Separate Economist Intelligence Unit research suggests that, although economic stimulus packages currently under way have a 60% chance of restoring stability by 2010-11, there remains a 20% probability that the world economy will enter a depression
There is no doubt that on a range of issues, including access to capital, profitability, return on equity and ability to increase output, many respondents to our survey believe that their companies cannot achieve the targets they were reaching a year ago
What emerges from our survey and from subsequent interviews with senior executives is that manufacturers acknowledge the problems they face and the need to cut costs But they also have clear ideas about implementing progressive strategies—not just to ride out the storm, but also to emerge in
a stronger position once economic recovery is in sight
Key findings from the survey are highlighted below
l Companies reveal a surprising level of optimism given the economic gloom The largest
proportion (28%) of respondents say they are affected by the recession and expect their company’s business prospects to deteriorate By contrast, the second-biggest group (24%) see the outlook
as good and expect business prospects to improve in the next 12 months However, the balance of negative and positive results suggests that our respondents are uncertain about the likely length and depth of the downturn
l Few companies are anticipating a prolonged downturn in business, although 2009 will be a tough year Many respondents (39%) expect conditions to improve for their company’s business within
24 months, compared with almost one-half (47%) who see this as applicable to their sector as a whole Meanwhile, 34% anticipate an upturn in business within the next year, and only 10% believe that an improvement will not be felt within the next two years
l Manufacturers face a wide array of challenges in the current downturn More than half of
the respondents are pessimistic that pressure on prices will have a large negative impact on their
Executive summary
Economist Intelligence
Unit, Manning the
Barricades, March 2009.
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3
businesses in the next year This pressure is also seen as affecting the outlook for manufacturers’ customers, with some 62% citing this as a concern “We see it clearly in that many of our customers all over the world are becoming very careful with their capital investments,” says Nils Bjorkman, executive vice-president responsible for worldwide commercial operations at Tetra Pak Strong pessimism was also expressed about availability of credit and exchange-rate movements (both 26%), while supply base stability and energy costs (both 22%) also rank highly as negative factors
l Cost-cutting emerges as the most common means of responding to the economic downturn’s impact on business Many respondents say staff and benefits cuts (44%) would do most to improve
their cash positions, followed by new partnerships with low-cost suppliers (41%) and reduced energy consumption (36%) “Pushing back on costs” was cited by the largest group of respondents (62%) when it came to ensuring the resilience of their supply chains Lay-offs are a big part of this—Boeing, for example, recently announced cuts from its commercial aircraft unit of 4,500 jobs, or almost 7% of the division’s workforce
l Supply chain resilience is seen as a critical factor in business survival The failure of suppliers’
businesses emerges as the greatest concern, with 63% of the manufacturers surveyed citing this
as having an immediate impact on their own supply chains and 56% seeing this as hampering their procurement strategy The problem is acute in the car industry supply chain, where specialisation and extreme interdependency mean that the failure of even one or two small firms can bring vehicle assembly lines to a halt In addition, more than one-half of respondents cite lack of access to capital (56%) and energy and raw material price volatility (55%) as having an immediate impact on their supply chains
l Many manufacturers see the downturn as a time to enhance their efficiency The biggest group
of respondents (63%) believe improvements to operational efficiency, both externally by rationalising supply lines and internally by using downtime to work on enhancing process efficiency, will do
most to enhance their company’s competitiveness, whereas almost one-half cite changes to their organisational structure (46%) Investing in research and development (R&D) for product and process innovation (45%) also remains important
l Companies see a variety of business benefits emerging from the recession Almost one-half
(45%) of respondents see the growing availability of talented workers as helping their business, compared with 42% who point to the advantages of reduced competition as other companies in their sector fail Meanwhile, merger and acquisition (M&A) possibilities rank highly (39%) as business opportunities, along with lower interest rates (37%) For Hewlett-Packard (HP), a manufacturer and supplier of computers and printers, the acquisition of EDS, a technology services company, in May last year has generated new business in helping clients to cut their costs “Outsourcing is fabulous,” says Maurice FitzGerald, head of Strategic Initiatives at HP’s technology solutions group for Europe, the Middle East and Africa “In our EDS business, the outlook for sales has never been in better shape What that says is more large corporations are considering outsourcing for short- and medium-term cost cutting.”
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As manufacturers struggle to survive in one of the toughest economic environments they have seen
for decades, they face myriad challenges These range from currency fluctuations and downward pressure on consumer product prices to customers’ falling inventories and concerns about the solvency
of suppliers
Up and down the supply chain, manufacturers are tackling a wide range of risks, from consumers’ reluctance to spend to falling sales among corporate buyers, who themselves are experiencing reduced demand for high-end products Tightening access to credit also constrains supply chain partners, with many of the manufacturers we polled concerned that their suppliers’ businesses will fail altogether Accenture, a consultancy, carried out a survey in November 2008 of 40 chief procurement officers or equivalent executives The results showed that almost 15% of respondents said suppliers had been put out of business or forced to merge with other companies and nearly 20% reported that their suppliers were unable to meet supply levels
Unsurprisingly, these problems are generating a certain level of pessimism among manufacturers
In our survey, many did not believe their company could achieve the same performance levels as 12 months ago in areas such as access to capital, profitability, return on equity and the ability to increase output
Last November, for example, Toyota, a leading Japanese carmaker, said that it expected a stronger yen, higher input prices and falling demand worldwide to lead to a 74% drop in net profits in the financial year that began in April.2
Manufacturing output levels are suffering, too US industrial production fell in March for the fifth consecutive month, by 1.5%, to its lowest level in more than a decade, while in February euro zone output fell by a record 18% from February 2008
However, in many respects, manufacturers are exhibiting a higher degree of confidence than might
be expected Many believe they are well positioned to retain existing customers and attract new ones,
to expand into new markets and to maintain a resilient supply chain
Moreover, savvy companies are clearly aware of the need to continue to innovate and build their R&D capabilities, not only by investing in technology and forming partnerships with other organisations but also by linking innovation to performance management
Many are also ready to address operational inefficiencies, to reshape their organisational structures and to rethink and strengthen their supply chains For some, this means sourcing products and components overseas, particularly in emerging markets, which were identified by more than one-third
of the manufacturers we surveyed as presenting the best sourcing opportunities in the next year
Introduction
2 The Economist, “Japan’s
economy: A tunnel, no
light”, November 15th 2008.
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Many of the challenging circumstances affecting manufacturers can be traced back to one factor:
the credit crunch This is reflected in the results of our survey, in which tightening credit supplies and lack of access to capital emerge as strong reasons for pessimism Less than a third of respondents describe themselves as optimistic about the availability of credit, while 40% are pessimistic
The credit crunch hits manufacturers in a number of ways Primarily, it has had a dramatic impact on spending, particularly on consumer durables such as washing machines and cars In 2008, US car sales slumped, with Ford and General Motors (GM) seeing falls of more than 20% each, and Chrysler of 30%3
“The bulk of that sort of demand in the marketplace is provided by credit purchases,” says Richard Spitzer, managing director for automotive and industrial equipment at Accenture “If you have to have
a credit score above 800 to qualify [the scale in the US’s FICO creditworthiness score system ranges from 300 to 850], a lot of people will be falling off the demand tree.”
In Europe, some assistance may come from government stimulus packages In the UK, the government is offering subsidies of up to £5,000 for purchases of electric cars, while in Germany the
Crunch, crunch, crunch
Overall business confidence Availability of credit Energy costs Transport costs Cost and availability of raw materials Ability to retain skilled workers Pressure on prices
Exchange rate movements Supply base stability Other, please specify
Please indicate your level of optimism with regard to the impact of the following factors on your company over the next 12 months
(% respondents)
1 31
24 26
11
4 14 26
26 24
5
3 5 22 32
33 6
2 4 18 34
35 7
1 16 24
46 9
2 2 11 19
51 15
2 17 40
23
5 14
6 7 26 39
18 4
2 6 22 33
32 5
48 8
12 14
13 5
Very optimistic Optimistic Neither optimistic nor pessimistic Pessimistic Very pessimistic Don't know/Not applicable
Key points
n The majority of manufacturers are feeling the squeeze with regards to credit availability
n Lack of access to credit is affecting not only them, but also their suppliers and customers
n CEOs are responding by cutting costs sharply Job losses will continue
3 The Economist, “The car
industry: The big chill”,
January 17th 2009.
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As domestic markets become tougher places in which to sell products, many manufacturers expect
to have to increase their exports in the next 12 months Of the manufacturers we polled, 46% say that they will increase exports, while 20% say that they will rely more on domestic markets
However, it is not only consumers for whom restricted lending is causing problems Corporate customers, too, are squeezed as lack of access to credit compromises their operations, particularly when it comes to larger capital investments
Tetra Pak, for example, has noted little change in demand for its consumer packaging but is experiencing a slowdown in sales of capital equipment “We’ve seen a reluctance during 2008 and 2009 to take on new big processing projects and new big packaging machine projects by our customers,” says Nils Bjorkman, executive vice-president for worldwide commercial operations at Tetra Pak “They are trying to push back their timelines as well.”
For manufacturers in sectors such as electronics, corporate customers’ lack of access to credit has had a knock-on effect “This is the crunch issue throughout the reseller channel,” says Maurice FitzGerald, head of Strategic Initiatives at Hewlett-Packard’s technology solutions group “Credit is more expensive so they want to cut back inventory, and if they cut back too much on inventory that plays into the hands of some of our competitors.”
But if consumers and resellers are suffering from lack of credit, so are manufacturers themselves, who rely on it to buy components and raw materials More than one-half (52%) of respondents to our
Failure of suppliers’ businesses Lack of access to capital Increasing volatility in the cost of raw materials and energy Trade barriers and/or protectionist policies
Increased government regulation Climate change risks such as prospects for more severe storms or droughts Threats or interruptions to the power supply
Terrorism threats and geopolitical instability Growing water scarcity
Other, please specify
63 56
55 26
24 9
8 3 1 1
Which of the following factors are likely to have the most immediate impact on the resilience of your company’s supply chains?
Please select up to three.
they want to cut
back inventory, and
if they cut back too
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survey cite tighter access to credit as hampering their company’s procurement strategy over the next year Meanwhile, 56% point to lack of access to capital as having the most immediate negative impact
on the resilience of their supply chains
“Not getting credit is at the top of the list,” says ManMohan Sodhi, professor in operations management at City University London’s Cass Business School “When you don’t have cash, you can’t buy raw materials; when you can’t get raw materials you can’t produce anything; and if you can’t produce anything, you can’t get any money from customers So the credit crunch is the number one problem.”
Tighter access to credit also means that manufacturers need to do all they can to free up working capital In our survey, improving access to working capital ranks fifth among the measures seen as improving companies’ cash positions in the next 12 months
It is hardly surprising, then, that cost-cutting—particularly through lay-offs—emerges as a strategy that many companies are deploying In April, for example, Sony-Ericsson, a mobile-phone maker, announced 2,000 job cuts in addition to the 2,000 it made last year In our survey, 44% of respondents cite cuts in staff and benefits cuts as a means of improving their company’s cash position Pushing back
on costs is seen by 62% of respondents as the best way to secure the resilience of their supply chains,
as will be explored in the next section
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While global capitalism is coming under scrutiny, the reality is that manufacturing supply chains
are more dispersed than ever, both organisationally and geographically Few respondents to our survey (6%) say that their companies produce all their output abroad and most (39%) say that their companies manufacture their entire output locally A similarly large group (38%) manufacture some
of their production overseas, and the same proportion say that emerging markets will present the greatest sourcing opportunities in the next 12 months
For many companies, these geographically dispersed patterns of procurement and production seem unlikely to change “The majority of our products are manufactured in Asia—primarily in China, Vietnam and Indonesia,” says Erin Dobson, director of corporate responsibility communications for Nike, a footwear and apparel company, which uses more than 700 contract factories in over 50 countries to make its products “There are no current plans to alter that focus.”
A number of factors have driven the global approach to manufacturing For some companies, the desire to tap into lucrative government contracts is behind relocation to facilities abroad The growth
of middle-class populations in emerging markets such as China is also a factor In our survey, 18% of manufacturers point to China as presenting the best prospects for sales in the next 12 months
For Pfizer, a pharmaceuticals group, increased reliance on outsourcing also reflects a desire
to be able to respond to changes in demand “One of the major reasons for doing plant network rationalisation is that you remove fixed costs from your base,” says Tony Maddaluna, vice-president of global manufacturing at Pfizer
Pfizer is currently implementing a plant rationalisation programme that will see the company make greater use of outsourcing It recently sold its Latina plant in Italy, a transaction bringing the proportion of its outsourced output to 24% The company expects this share to rise to 30% over the next two years
As well as the desire to incorporate flexibility, drivers that affect Pfizer’s decisions on internal and external options in its rationalisation process include competitiveness, need for special technology, cost control and site divestitures
The cost driver is a strong one for UK-based GKN Aerospace “For us, it’s about how to keep ourselves
in a position to deliver the most competitive offering—and that’s a balance of technology as well
Globally dispersed
Key points
n Rationalisation of manufacturing facilities is in vogue
n Environmental concerns are also heightened, but primarily where cost savings can be extracted
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As recession puts pressure on manufacturers to cut costs, the trend towards outsourcing is likely
to gain momentum “Companies are accelerating decisions that they might [previously] have taken
at a more pedestrian pace,” says Mr Spitzer of Accenture “Saving that amount of money in the near term is an imperative that is far greater than it was a few years ago, when everyone seemed to be riding prosperity.”
External attention on these issues will force us to alter our product range and/or processes
Addressing these issues will help us to reach new customers
Addressing these issues will generate cost savings for us
Addressing these issues will enhance my company's brand
Complying with these issues will drive up my company's process costs
Please state whether you agree or disagree with the following statements regarding the possible impact of climate change and environmental
sustainability issues on your business in the next 12 months
(% respondents)
49 40 55 26 36
51
60 45
74 64
Agree Disagree
Lean and green
If companies are looking to cut costs, one strategy allows them
to do so while also addressing another big issue—environmental
sustainability Water conservation, reduced energy consumption
and increased recycling can pay dividends in terms of operational
cost savings Envirowise, a UK government-backed environmental
consultancy, believes that British companies could save £9m a day
through water efficiency measures such as fixing leaks
There is a growing body of evidence to support the idea that
resource efficiency and environmental conservation can contribute
to cost savings In the US, when KKR, a private equity firm,
and Environmental Defense Fund worked with Sealy, a bedding
manufacturer, improvements in process efficiency generated by
the collaboration saved Sealy more than US$4m in material costs
Moreover, reducing scrap per bed by 16% avoided 650 tonnes of
solid waste
“There are enormous opportunities in creating process efficiencies using environmental controls as filters,” says Erin Dobson, director of corporate responsibility communications at Nike, a footwear and apparel company “Increased energy efficiency and reduced waste outputs, as well as harnessing the innovations that will come from working to solve environmental challenges, will provide unique opportunities for cost savings.”
Our survey indicates that many manufacturers see the benefits
of energy efficiency Energy consumption cuts is cited by 36%
of respondents as the best way to improve their company’s cash position in the next year, and around 60% see environmental measures as helping to reach new customers
However, a perception remains among some manufacturers that addressing climate change and environmental sustainability raises costs A smaller proportion of respondents (45%) see this
as generating cost savings than those who believe it would not deliver those savings (55%), compared with 64% who believe these measures would drive up their company’s process costs
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If manufacturers have to keep an eye on their own financial health, they also have to be aware
of what is going on in increasingly complex and geographically dispersed supply chains Both upstream and downstream, this is where tough economic circumstances may be having an impact
In recent decades, as global manufacturers have embraced just-in-time delivery and looked to outsource increasing amounts of their production, companies have established extensive and complex supply networks across the globe Boeing, for example, relied on more than 40 partners worldwide to develop and produce its 787 aircraft, with less than 10% of the responsibility undertaken by Boeing itself
Prioritising speed of delivery and low inventories, manufacturers shipped goods only when retailers needed them This approach to manufacturing has led to extremely close relationships between some companies and their suppliers However, although such relationships enhance cost efficiencies and allow companies to tap into the innovation of their suppliers, they may be left exposed to any breaks in the chain
More than one-half (56%) of our survey respondents cite failure of their suppliers’ businesses as the factor most likely to hamper their company’s procurement strategy in the next 12 months A total of 63% say it is their biggest concern when considering the resilience of their supply chains
Securing the chain
Pushing back on costs Conducting more thorough due diligence on our suppliers Increasing the number of our suppliers
Sourcing suppliers closer to home Reducing the number of our suppliers
We will not be making any changes Other, please specify
62 49
31 29 26 11
4
Which of the following steps will your company take to ensure the robustness of your supply chain over the next 12 months?
Please select all that apply.
(% respondents)
Key points
n Just-in-time supply chains have helped cut costs and boost responsiveness, but are also creating a greater exposure to risk during the crunch
n To survive, manufacturers are squeezing suppliers on costs, but also diversifying
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Manufacturers are responding in several ways First, they are conducting due diligence on business partners more frequently and more thoroughly In our survey, this was the second most important step manufacturers were likely to take to shore up their supply chain, with 49% of respondents citing this measure
Pfizer, for example, is conducting an ongoing review of its contract manufacturing to assess the financial situation of all its most important supply partners “Where there’s a sole supplier, we have to
be prepared to work with them closely,” says Mr Maddaluna “If it’s a situation where we’re sourced, we can probably shift sourcing of particular products, so we’re pretty well diversified.”
multiple-If suppliers are in financial difficulties, companies can to a certain extent fill the gaps with orders “And now some stronger OEMs [original equipment manufacturers] are not so much extending credit but extending their credit rating to their suppliers when they have a critical supplier that cannot get things done because they don’t have good credit,” says Yossi Sheffi, professor at Massachusetts Institute of Technology and director of MIT’s Centre for Transportation and Logistics “Naturally, they are taking on some risk, but it does not use cash in the short term.”
pre-In addition, manufacturers are building greater levels of risk management into contracts, with the inclusion of a growing number of conditions “There are a lot of ifs and buts,” comments Professor Sheffi
However, building flexibility into the supply chain by identifying other potential suppliers is also seen as important, with 31% of the manufacturers we surveyed indicating that they would be increasing the number of suppliers with whom they do business
According to Mr Bamford, GKN Aerospace was doing this even before the recession hit “We’ve been planning our business to smooth the peaks and troughs with strategic supplier partnerships so when the downturn comes we can reduce our capacity,” he says “And they’re working with more than one customer, which is why we’ve built a portfolio with multiple programmes and multiple customers—so
we can shrink too.”
“We’ve been
planning our
business to
smooth the peaks
and troughs with