No IT, No Globalization

In the midsize production industry, the complexity of products and the number of product variants is rising. In a global survey of 650 midsize production companies, the management consulting firm Deloitte Research found that products that make up 70 percent of sales today will no longer be contributing by 2010. This is due among other things to new patterns of demand on the part of customers. For example, while the average life cycle of a European model in the automotive industry was nine years in 1990, it fell below the seven-year mark for the first time in 1999, and this trend is continuing. The shorter cycles are causing products such as electrical components or brake systems to become outdated more quickly. At the same time, companies are faced with the challenge of minimizing costs (for personnel, administration, and production) and capturing new markets as a result of reduced customer loyalty and global competition. In many sectors, including SME, numerous production companies are therefore relocating their production plants to eastern Europe and Asia.

Paradigm shift in the supply chain

According to AMR Research, the diverse requirements are causing a paradigm shift in the production industry, away from the supplier-oriented supply chain model and towards demand-driven vendor networks. Extremely flexible supply chains are required to meet short-term orders on time, because, today’s companies need to “react in real time to business transactions,” according to the US consulting firm AMI Partners.
To make themselves indispensable, midsize production companies are therefore increasingly transforming themselves from pure product manufacturers to system suppliers. For Jackie Chan, senior analyst at AMI Partners, it’s clear that midsize production companies now need to introduce integrated production and business processes in order to improve their profitability.
A prerequisite for this is a “cross-functional” approach, as formulated by supply chain expert John T. Mentzer. “Effective supply chain management“, explains Mentzer in the online edition of the Supply & Demand Chain Executive magazine, “requires coordinated activities between marketing, sales, logistics, production, procurement, accounting, and financial functions of all the supply chain partners.“

Integrated software is a must

The international consulting firm Pierre Audoin Consultants (PAC) arrived at a similar conclusion following a recent study in the production industry. This showed that midsize manufacturers, in particular, were being forced to optimize their supply chain and product development processes in the face of cost pressures, globalization, the concentration on core competences, new legislation, and higher demands relating to flexibility and reaction speed. To fully exploit the potential for improvement, companies need to harmonize and standardize their IT landscapes, but this is often a stumbling block, because according to PAC, most still have heterogeneous system landscapes, and the data is not connected to systems at business levels or other plants.
“The company’s head office usually uses a modern ERP solution, while regional sales offices sometimes still use Word documents or Excel tables to manage their projects, and therefore work on their own data island,” explains Marcus Hassel, who is responsible for industry solutions at IT service provider itelligence. Data exchange between the head office and subsidiaries is therefore difficult and complex, and redundant data maintenance causes costs to soar. “Because even small automotive suppliers and production companies operate on a global scale with branches all around the world, the use of a standard business software is really a must,” says Hassel. Midsize production companies or suppliers that integrate their business areas save up to 50 percent of purchasing and delivery costs, according management and technology consultants Booz Allen Hamilton. According to an independent benchmarking study conducted by management consultants Pittiglio Rabin Todd & McGrath (PRTM) among SAP customers, the net profits of companies with sophisticated supply chain processes are 75 percent above the market average.
According to the PRTM benchmark, companies that work on the basis of the planning functions of mySAP Supply Chain Management (mySAP SCM) are able to reduce their daily minimum stock in the warehouse by around 40 percent. Warehousing costs can fall by up to 63 percent as a result, which leads to an average increase in earnings of 1.7 percent.

Breaking the downward spiral…

In stark contrast to these requirements and potential, many SMEs from the production and mechanical engineering industries have reduced their IT investments in recent years as a result of the tense market situation, as reported in a study (“Business Success through IT”) published in 2003 by Accenture Germany. According to the authors of the study, IT expenses were often the first thing to be put under the microscope in periods of general economic difficulty. According to Accenture, this leads to a dangerous “downward spiral.”
Since then, however, a counter-process seems to have got under way. “Smaller manufacturing companies, in particular, have realized that they do not have the IT architecture needed to be competitive in a demand-driven market,” notes David Caruso, Senior Vice President at AMR Research. “Enterprises are therefore putting their existing ERP solutions under the microscope and adapting them using new functionalities and upgrades, or are switching to a new system.”

… Willingness to invest increasing in the SME sector

As a result, market researchers are increasingly seeing a willingness to invest among SMEs. The consultants at PAC expect market growth for software and IT services up to 2009 in view of the currently positive economic outlook for the production industry in Germany. In 2006, the focus is on investments in ERP systems as well as IT solutions for marketing, sales, and service, according to PAC.
In a joint study, the consulting firm AMR Research and Managing Automation looked at the investments in ERP software made by midsize production companies in the United States. Of the 550 or so companies involved in the study, 16 percent said they had evaluated an ERP solution for the first time in 2005. Around 40 had completed ERP implementation projects within the last two years, and almost half the companies were planning to modernize their existing ERP software in the coming 12 to 18 months.
In the Asia-Pacific region (excluding Japan), AMI Partners predicts that small and midsize production companies will spend around 23.5 billion US dollars on modernizing their IT in 2006, which represents an increase of 16 percent over the previous year. Among production companies with up to 99 employees, AMI Partners expects even higher growth rates. With the planned investments, the small companies in this business region are specifically addressing the aforementioned requirements: managing warehouse stocks more efficiently, forecasting customer demand more accurately (demand forecasting), and reducing costs for production and the supply chain. This was shown in a survey by Manufacturing Insights, a member of the IDC group.

It’s all about the right software

Requirements of this kind can easily be met with software designed for the global market. A solution must be able to map production processes across boundaries, be highly standardized despite country-specific requirements and local specifications (e.g. tax calculation, payroll, depreciation methods, charts of accounts), enable organizational coordination between the locations, and offer integrated reporting and consolidation.
Marcus Hassel also advises SMEs with locations in China, Japan, or South Korea to use the Unicode standard, which supports practically all character sets and therefore avoids the limitations of incompatible, language- and platform-dependent codepages. For this reason, all SAP solutions are now Unicode-enabled; an SAP user who logs on in Germany in Chinese sees all the Chinese characters correctly, even though he or she is working with a German-language operating system. Similarly, an SAP user in China who accesses the system in German will see the German characters displayed correctly.
It also makes good business sense to invest in a Unicode-enabled software because Unicode accelerates cross-enterprise communication and allows processes to be mapped transparently and controlled effectively. This improves economic performance over the long term, and this, in particular, is one of the main reasons SMEs should be spending money on new software, according to Gartner analyst James A. Browning.

More information

John T. Mentzer, Critical Skills for Effective Supply Chain Leaders, in: Supply & Demand Chain Executive

Dr. Andreas Schaffry
Dr. Andreas Schaffry