How to align operations and finance around a common vision

Transcription

How to align operations and finance around a common vision
Courage and
perspective
in manufacturing
How to align
operations and
finance around a
common vision
Contacts
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Düsseldorf
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Peter Behner
Partner
+49-30-88705-841
peter.behner
@strategyand.pwc.com
Peter Heckmann
Partner
+49-211-3890-122
peter.heckmann
@strategyand.pwc.com
Francesco Lucciola
Principal
+39-02-72-50-91
francesco.lucciola
@strategyand.pwc.com
Tim Jackson
Partner
+61-2-9321-1923
tim.jackson
@strategyand.pwc.com
Chicago
Florham Park
San Francisco
Tokyo
Eric Dustman
Partner
+1-312-578-4740
eric.dustman
@strategyand.pwc.com
Albert Kent
Partner
+1-973-410-7660
albert.kent
@strategyand.pwc.com
Thom Bales
Partner
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thom.bales
@strategyand.pwc.com
Kenji Mitsui
Partner
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kenji.mitsui
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Arvind Kaushal
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arvind.kaushal
@strategyand.pwc.com
Melbourne
Patricia Riedl
Principal
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patricia.riedl
@strategyand.pwc.com
2
Benjamin Gilbertson
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ben.gilbertson
@strategyand.pwc.com
Strategy&
About the authors
Albert Kent is a partner with Strategy& based in Florham Park, N.J.
A recognized expert on manufacturing strategy, cost reduction, and
operations, he works with companies in the industrial, chemicals, and
energy industries.
Eric Dustman is a partner with Strategy& based in Chicago.
He focuses on operations transformation, including strategic sourcing,
manufacturing, and supply chain management.
Arvind Kaushal is a partner with Strategy& based in Chicago. He leads
the firm’s North American manufacturing team and specializes in
manufacturing and product strategy, and assessing relative competitive
positions across the value chain.
This report was originally published by Booz & Company in 2013.
Strategy&
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Executive summary
Many of today’s industrial giants have a problem with their
manufacturing footprints. They’re bloated. Ancillary activities added
during years of global expansion are draining resources from the core
strengths that once fueled growth. Thus it’s harder to prioritize
spending and investments strategically.
Manufacturers can address this problem by refocusing investment on
the narrower set of core activities that give their products a competitive
edge. They should de-emphasize or outsource noncore activities that
don’t strengthen their competitive position or bottom line. Shifting
capital and attention to higher-return core activities will drive growth,
expand profit margins, and make manufacturing a powerful strategic
advantage in increasingly competitive markets.
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Strategy&
The frustrating ritual
of manufacturing
investment
Anyone who works in a manufacturing company has probably
experienced it — finance and operations executives struggling to agree
on investment priorities for the next year.
The dance goes something like this: CFOs are bombarded with funding
proposals from far-flung factories and reflexively bat down the COOs’
initial requests. COOs, in turn, learn to start the bidding well above the
amount they really expect to get. Eventual compromises tend to reflect
gamesmanship and bargaining power, rather than agreement on the
company’s manufacturing objectives.
It’s not that finance and operations are natural enemies — they just
lack a way to align on the goals of the company to help prioritize
investments together.
How did we get here?
Between 1950 and 2000, a half century of expansion turned many U.S.
manufacturers into global giants. But this growth came at a price: a loss
of focus on the core strengths that distinguished each manufacturer in
the marketplace.
Many of these companies invested across a wide range of activities
within their manufacturing operations. They made significant
investments in new, specialized computer-based manufacturing
processes (often to watch them become commodities a few years later);
they placed bets on new products that used manufacturing processes
and technologies outside their comfort zone (and saw competitors that
had more familiarity with those technologies offer their products at
lower prices); and they brought in new processes and technologies that
worked effectively but applied to only a small subset of their products.
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This created a group of unrelated, ad hoc operating models that
consumed capital unnecessarily, sapped returns, and made many
manufacturers vulnerable to rivals that were more focused.
Unfortunately, most companies have not addressed the underlying
complexity of their operations. They have added more and more
technology and process without stopping to ask whether each element
truly adds value.
A study conducted in 2011 by the Economist found that executives
believe their businesses have become more complex. Moreover, these
additional complexities have increased the overall cost of doing
business (see Exhibit 1, next page). On average, companies are losing an
estimated 7 to 10 percent in profit (EBITDA) as a result of valuedestructive complexity. A reframing of manufacturing investment is
sorely needed: to help bring operations and finance together, in line
with the company’s strategy, and to make manufacturing more of a
source of competitive advantage.
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Strategy&
Exhibit 1
An increase in perceived complexity
Yes, substantially
more complex
28%
86% of
executives
indicated a
three-year
rise in
complexity
Yes, significantly
86% said
complexity
is increasing
34% total cost
Yes, marginally
Yes, somewhat more complex
58%
No change
52%
No
12%
No, has become somewhat less complex
3%
12%
Unknown
2%
No, has become substantially less complex
0
Has your business become more or less
complex over the past three years?
Strategy&
Is complexity increasing the overall
cost of doing business?
Source: The Economist;
Royal Bank of Scotland;
Advanced Institute of
Management Research;
Strategy& analysis
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Creating advantage in
manufacturing
Advantage in manufacturing is often misunderstood. It is seen as
related either to business strategy, the choice of what products to make
and how to meet the needs of customers, or to shop-floor operations, the
combination of interrelated processes, tools, people, know-how, and
organization that enables a company to deliver on that unique value
proposition.
Both the business strategy and the operations model are important, but
only in the context of what makes a company distinctive — how its mix
of product, process, and people enables it to deliver something relevant
to customers that nobody else can.
Research shows that companies focused on what is core are more
profitable.
In one study, reported in the Harvard Business Review, Strategy&
measured the EBIT margins and shareholder returns of leading
consumer packaged goods manufacturers over a six-year period.
Companies that closely aligned their way to play in the market with an
integrated capabilities system and the full line of products and services
enjoyed superior returns by both measures; Coca-Cola, Kimberly-Clark,
PepsiCo, and Wrigley were in this group. Companies lacking in focus
during this time frame, such as ConAgra and Sara Lee, measured
significantly lower on the performance scales.1
The business
strategy and
the operations
model are
important,
but only in
the context of
what makes
a company
distinctive.
Similar results were found in a study of chemical industry
manufacturers, which reported that “the TSR for focused, nondiversified, chemical firms is nine percentage points higher year-overyear than that of diversified companies.” The authors posited that these
companies are “more internally coherent, resulting in more synergies,
more management focus, and potentially larger scale in their selected
markets.”2
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Strategy&
Bringing operations
and finance together
Creating focus in operations requires manufacturing leaders to ensure
that the operational plan is focused on supporting and leveraging the
company’s core: the strategic value proposition and handful of strong
capabilities that truly differentiate it in the market. Operations leaders
need to ask themselves what it is about their manufacturing operations
that helps make their products distinctive.
On the other side of the coin, finance leaders also need to ask
themselves a question: Does the investment plan support our true core
capabilities, or are our investment dollars focused on supporting
operations that are not really differentiators? And once the noncore
areas are understood, these leaders need to determine how to address
them: Should investments be reduced (focused on an austere version of
repair/replace), or should these noncore operations be outsourced?
It takes an informed perspective to come to the right conclusions. In
many companies, the answer may not be obvious, because it hasn’t been
thought through or articulated.
It will also take courage to act on the conclusions you reach, and to
make the hard choices that align shop-floor investments with a tightly
defined set of competitive strengths. Reorienting manufacturing around
a chosen group of core activities is a difficult process that will encounter
opposition at many levels. Noncore activities may have deep roots in the
organization, and powerful defenders would naturally resist any
attempt to outsource or scale back their fiefdoms. Success therefore
requires a full commitment from top executives and a sustained effort
to gain input from the entire organization and deal effectively with
people’s concerns.
For finance and operations leaders, this is a moment rich in opportunity.
Getting it right will free up substantial capital, improve focus, and
reduce cost. It will provide you with an operations and investment game
plan that could be sustainable well into the next five years.
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How to find your core
At the manufacturing level, setting your agenda begins by defining
what complexity is important and what complexity is not helping. In
other words, you need to understand what is “core” to your business
(aligned with your company’s strategy and distinctive capabilities
system).
The identification of these activities requires a deep understanding of
both the economics of the product and what the customer truly values.
You begin with a holistic review of the product portfolio and the
supporting manufacturing operations to identify core strengths. Your
analysis must span both products and manufacturing processes.
Examine your assets, processes, and facilities to determine which ones
support a sustainable differentiating capability and therefore help your
company deliver on its unique value proposition. For a sample
evaluation template, see Exhibit 2, next page.
When thinking about activities, it’s important to be able to divide them
into three strategic categories — core, noncore, and situational (see
Exhibit 3, page 12).
• Core: A manufacturing activity is core when it contributes to the
company’s value proposition. It may contribute to the distinctive
features that give a product a differentiating advantage in the
marketplace. Or it may be the source of cost advantages through
process technology, scale, location, or other factors. A better
understanding of these core strengths will enable better decisions
about how to develop, expand, and defend your competitive
advantage — not just in the manufacturing function, but throughout
the enterprise. Direct your capital spending to these areas of existing
or potential advantage; create systems to protect these important
processes and product technologies from competitors; and adjust
your organizational structure to take full advantage of key
capabilities across internal boundaries.
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Strategy&
Exhibit 2
Criteria for evaluating manufacturing activities (core vs. noncore)
Overall market requirement and degree
of differentiation in the marketplace
Sources of advantage (e.g., design-driven cost
reduction, design for manufacturability)
Product
Linkages and points of integration
with other advantaged products
Relative cost position
Degree of sustainability of
product advantages
Relative cost position
· Inherent advantages (e.g., process technology)
Manufacturing
· Structural advantages (e.g., production factors)
· Systemic advantages (e.g., a lean operating system,
the ability to quickly customize, supply policies)
Degrees of integration among processes and capabilities
Extent to which process and capability advantages
are sustainable over the long term
Source: Strategy&
• Noncore: When it comes to noncore activities, your examination also
may reveal some troubling truths. Many companies hold a position
in the marketplace that is based on the legacy effects of previous
investments, reputation, and old capabilities that no longer
represent a competitive advantage. The position may be declining,
but it may be hard to let go of these activities, even if they do not
count for much in today’s markets. Disconcerting as such insights
may be, they highlight previously unseen risks. A closer look at these
vulnerabilities will enable you to eliminate them, either by deemphasizing an activity, or by taking the steps necessary to make it a
core strength again.
Strategy&
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Exhibit 3
Analysis of the core value of a manufacturing activity
Core
Situational
Noncore
This activity is responsible
for a current or potential
differentiating advantage
in the marketplace
It is unclear whether a
protectable advantage
currently exists or can be
created for this activity
This activity provides little
or no advantage: no
improvement of the
product’s differentiation
Delivers a cost advantage
through process
technology, scale, location,
factor costs,distribution,
etc.
May offer an advantage
but is available to all
players (maybe a process
technology)—the
advantage is not
developed by client (but it
could be “core” if client’s
scale enables client to be
one of a few competitors
to have access to the
technology)
Other options exist to
perform the process that
are equally or more
cost-effective
Connected to an
advantaged process in a
way that cannot be
economically separated
Provides systemic
advantage (as part of a
general process, like lean
or fast new product
launches, which also lead
to inherent and realized
advantage)
Ideally these advantages
are sustainable and can
enable continued
sustainable advantage
in a core product
Can derive a cost
advantage relative to other
local or regional options,
due to lack of capable
suppliers (certain heat
treatment processes in
China or chroming
processes in the U.S.)
Process capabilities are
well understood and
executed in the market
(by competitors, suppliers,
etc.)
Separable from a core
process
In the hands of a
competitor, does not
confer an advantage
Not part of a systemic
advantage
Is connected to core
processes in certain
situations but not in others
Source: Strategy&
• Situational: In the middle are some hard decisions, deemed
“situational.” These activities might potentially create a sustainable
advantage under certain circumstances, or they differentiate
products in some regions or markets but not in others, or they’re
sometimes but not always embedded in core processes. Sometimes a
situational operations practice can represent a signal that you have
an outlier product — one that differs enough from the rest of your
products that it cannot realize its potential under your roof, and the
company would be better off divesting it.
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Strategy&
Identifying core activities:
The ISSR analysis
Many manufacturing organizations have real difficulty in visualizing a
streamlined company focused on only a few key areas that really
matter. How does that translate into day-to-day decisions and specific
investments? To be able to effectively answer this question, and bring
people on board, you need a disciplined analysis that can be defended
and communicated throughout your organization.
We recommend that you assess your activities across four dimensions of
manufacturing operations: inherent (I), structural (S), systemic (S), and
realized (R). The resulting analytical framework, known as ISSR, sheds
light on the decisions and other factors that led to your current
manufacturing cost structure. Understanding these factors will help you
separate core activities from situational and noncore functions. Then
you can make the right choices about which operations to build up and
which to de-emphasize or outsource.
For each dimension of this ISSR analysis, determine if an activity has
a sustainable advantage (see Exhibit 4, next page).
• Inherent advantage: An inherent advantage often derives from
differentiating technology that enables a manufacturer to create
unique value for customers through product design or production
processes that competitors can’t replicate.
For example, advanced injection-molding equipment with faster
cycle times can give you an advantage over rivals using slower
machines. A railcar manufacturer might set itself apart by designing
cars with straight walls, which offer customers more efficiency than
competitors’ curved-wall cars.
As the analysis proceeds, consider the technological aspects of
this advantage, the underlying intellectual property, the process
steps necessary to create it, and the actions that can be taken to
enhance it.
Strategy&
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Exhibit 4
An ISSR analysis
Market
requirements
Typical
questions
“How do we satisfy the
customer product and
service requirements?”
“How do we
deploy our
assets to best
serve customers
at the lowest
cost, and who
should own
them?”
“How do we
manage
and control
the business
operations?”
“How do we
maximize
efficiency in
the daily
work?”
Product
design
Inherent
costs
Probable
focus of action
Technology
investment
and product
redesign
Process
technology
Sourcing/
distribution
economics
Location
economics
Scale and
utilization
Plant focus
and complexity
Manufacturing
strategy
Structural
costs
Sourcing
policy
Supply chain
structure
Inventory
policy
Restructuring
manufacturing
and distribution
assets
Customer
demographics
Experience
Service and
supply policies
Tactical planning
processes
Supply chain
control
architecture
Systemic
costs
Manufacturing
efficiency
Material
usage
Manufacturing
flexibility
Systems
support and
infrastructure
Business
processes
Enabling
structure
Changes to
system and
organization
structure
Purchasing
skills
Realized
costs
Distribution
efficiency
Service
effectiveness
Operational
improvements
Source: Strategy&
• Structural advantage: A structural advantage is rooted in scale: the
size and location of a manufacturer’s plants, its level of vertical
integration, factor costs, distribution systems, or other
characteristics that increase market power or create cost
advantages.
If you are in a labor-intensive industry, you might gain a structural
advantage by locating plants in low-wage countries. Another way of
gaining structural advantage is to reduce per-unit overhead costs by
consolidating operations in a single plant.
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Strategy&
To determine whether a company has a structural advantage over
competitors, look at factors like industry structure and the
production volumes of various rivals. Also consider whether your
manufacturing processes are optimized to create a sustainable cost
advantage through tools, automation, supplier integration, or new
production technologies. Are there steps that can be taken to bolster
structural advantages and their sustainability?
• Systemic advantage: Systemic advantages arise from the way the
plants operate — the policies, procedures, and methods that define
the manufacturing processes. These factors determine the quality of
the products and the efficiency of the factories.
Toyota’s widely admired lean manufacturing system is a classic
example of a factor that creates systemic advantage. It gives the
automaker advantages in cost, efficiency, and flexibility. But a
systemic advantage can be as simple as finding a better approach to
inventory management.
• Realized advantage: The actual results achieved on the factory floor.
For example, a company that changes over its equipment faster has a
realized cost advantage over competitors.
It comes down to execution — how well various manufacturing tasks
are performed. Without strong execution, other advantages can
break down. For example, the cost advantage gained from a better
inventory management approach won’t materialize if the people in
your plants can’t carry it out.
A complete analysis gives a deep understanding of the extent, nature,
and durability of the competitive advantages in each product and
process. It forms a basis for decisions about where to invest and where
to cut back or outsource (see “Restructuring a Large Equipment
Manufacturer,” next page).
As a manufacturing leader following a core-versus-noncore agenda, you
will need to channel spending to activities that give your company a
cost advantage in the market, or that make your products valuable to
customers in a way competitors can’t match.
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Restructuring a large equipment manufacturer
A multinational industrial manufacturer
needed to reduce the cost of one line of
large equipment as part of an annual
investment strategy aimed at creating a
low-cost value proposition for this key
product. The manufacturer had amassed
many investment requests, all geared to
reducing cost. At the same time, many
of the requests asked for substantial
investment in metal bending.
An analysis was conducted of coreversus-noncore operations practices,
comparing cost structures against those
of competitors. The analysis identified
the problem: The manufacturer’s metalbending and fabrication processes were
too expensive in light of their strategic
relevance. Most competitors had reduced
their spending in these areas by farming
out metal bending to fabricators in lowcost regions of the U.S. and northern
Mexico.
Guided by the core-versus-noncore
perspective, the company decided
that it could follow suit without
affecting its core strengths in the
design and engineering of distinctive
manufacturing systems. Outsourcing
metal bending would put this noncore
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activity in the hands of a capable
supplier, which was positioned to take
advantage of lower labor rates that the
primary company couldn’t manage
at its own plants. Ultimately, several
processes were outsourced or moved to
low-cost locales.
The company’s union and engineering
department wanted to keep the work,
and the move required three months of
difficult change management. The case
was made to the union that outsourcing
noncore activities would allow for deeper
reinvestment in core capabilities.
In the end, the restructuring strategy
paid off. It increased the company’s
return on capital and earnings per share.
Perhaps the best result is the company’s
increased focus on return on investment
and asset profitability and its new ability
to play effectively in the market — with
clear support from the union, and a
strategic rationale recognized by all
stakeholders. As an added bonus, the
client was able to reduce investment
requests by nearly half — allowing it
to focus spending on some of its true
differentiators, such as compression and
control.
Strategy&
A door to proficiency
One company we know well, a manufacturer of hardware building
products, used the ISSR approach to identify core and noncore elements
in the production process for one component of the systems — steel
security doors. An analysis of each step in the value chain allowed the
client to isolate core capabilities. As part of the analysis, activities were
divided into the three strategic categories:
Noncore: The analytic process identified activities that could be
outsourced without compromising a competitive advantage, such as
assembly and painting of security doors.
Situational: The process also showed that the uncoiling and the cutting
of sheet metal for the doors aren’t core strengths but are so tightly
linked to the core activity of metal bending that they probably shouldn’t
be outsourced.
Core: Interestingly, only the bending of metal turned out to be a truly
core capability (because of the complexity associated with correct and
trouble-free programming of bending equipment). In our assessment,
there was little about manufacturing security doors that was actually
core — most of the processes were easily reproducible by other
competitors, even startups.
Through work with sales and marketing, it became clear that one major
core element was the role of the final product itself. Although the doors
themselves aren’t competitively advantaged, it was important to have a
product that could be specified together with the higher-margin security
hardware.
Any
manufacturer
can reap the
benefits of a
core-versusnoncore
manufacturing
agenda by
determining
which of its
activities
underpin a key
competitive
advantage.
Any manufacturer can reap the benefits of a core-versus-noncore
manufacturing agenda by determining which of its many activities
underpin a key competitive advantage, and focusing its investments,
resources, and management attention on those areas. Other aspects of
production may be outsourced or, if they can’t easily be separated from
core activities, targeted for deep spending cuts.
Strategy&
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Toward a more
focused future
In many companies, it’s time for finance and operations to join forces
around a common plan to recapture the focus their organizations lost
during decades of global expansion. Working together, they can boost
investment in the core strengths that set them apart from competitors.
Shedding or de-emphasizing noncore activities will free up capital,
cash, and talent for the activities that support the company’s
differentiating capabilities and create unique value in the marketplace.
It’s not easy — making the needed changes will take real leadership and
a dispassionate perspective on what really matters. But we have seen
enough successful cases to know that it can be done, with a little bit of
courage and perspective.
The battle is worth fighting. Refocusing on core strengths enables a
manufacturer to simultaneously cut costs and boost investments in
high-return activities. Financial results will improve as manufacturing
operations create sustainable competitive advantages. Sales, profit
margins, and returns on assets will all rise as investments shift from
low-yielding noncore functions to the core activities that produce more
bang for the buck.
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Strategy&
Endnotes
Paul Leinwand and Cesare Mainardi, “The Coherence Premium,” Harvard
Business Review, June 2010.
1
Kees Cools and Marco Zuijderwijk, “Wisdom of Winners,” ICIS Chemical
Business, Jan. 4, 2013.
2
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