The New Manufacturing Paradigm

September 22, 2010

Business

My eyes have been opened. The whole notion of a global economy is a bit different than I thought. I always thought a Global Economy was commonality or fewer differences in doing business from one country to another or one part of the world to another. That it was the attitude, personality, and expectations in business coming together globally. That it was the ability to source products and services from one country while selling in others. While these things are occurring and for real,specific to what is referred to as the manufacturing sector things are changing further.  Companies that just a few years ago that “manufactured products” really don’t anymore – at least by the traditional definition.  In fact most don’t engineer their products no less manufacture them.  Instead they conceive the product and hand off the final design, engineering, and manufacturing to a new breed of company that specializes in this.

This is different than the traditional “outsourced manufacturing” where companies would find a partner to only manufacturer the product they designed, prototyped, and built the early production run. The new model is dimensionally different.

The new manufacturing companies simply create a vision for a product or family of products, provide specifications for a form factor and key elements of performance, and hand off the specifications to a contract manufacturer to do the rest. Made in China, Japan or Indonesia, Taiwan, Malaysia, etc. used to mean that was where the product was put together or assembled. Today it means more. Contract Manufacturing in these countries involves R&D, engineering, product development, and quality manufacturing.  Traditional Manufacturing companies are becoming design and marketing companies leaving the actual engineering and manufacturing to others.

Companies that had thousands of employees a few years ago doing all the work from R&D through packaging the products they manufactured, now have far fewer employees focused on market research, business intelligence, marketing, business development and navigating the changes in value that the new business model brings. When I first started following this evolution in outsourced manufacturing and moving work away from a company I was confused and concerned.  As it related specifically to the US market:

How could America move this work overseas?

How could the United States allow for local jobs to move offshore?

Was it a means to generate more profit (read greed) or a requirement to stay competitive and remain in business?

Some of these companies must be hurting as they are far smaller than before (as measured in employee headcount)

Based on what I knew at the time I was taken aback by the whole thing. How could we let this happen?

Things appeared to be unraveling before my eyes. We were losing our prowess in manufacturing, in the very staple function that this great country was built on… I was wrong.

I have since come to believe that this is actually good for America, consumers, and businesses that are smart enough to lead and capitalize in this new business paradigm. A new model that resembles a service model much more than a manufacturing one. Take for instance Apple. A lot of us have Apple products whether an Ipod, IPhone or any number of Mac products. Very Smart Apple employees spend their time listening to the market, looking into the future, understanding technology, price points, competition, etc. yet not manufacturing. What Apple does extremely well is take all of this intelligence and put it neatly into a product specification to hand off to a company that is in a much better position to engineer, finalize design, and manufacture efficiently and effectively at price points that are pretty amazing when you consider what the product delivers. This could not be done if Apple did it all and, yes, did the manufacturing in the US. Too much time would be spent on manufacturing optimization, tools, plant and equipment and quality improvements. Labor and burden costs are just too high in the US to deliver lower costs that ultimately allow Apple products to be in the reach of just about anyone.  Apple is a very “fast” company thanks, in part, to their manufacturing model.  The value of Apple the company significantly greater than the traditional multiple of revenue a “manufacturing company” would garnish. Apple has a lot of cash in the bank and a net worth as a company that is significant.

To be competitive companies that “manufacture” must participate in the new model. Look at the Video Display Market. It is simply amazing to have seen in just a few years not only the price point for LCD and Plasma TVs coming down as quickly as it has but to seethe improvements in quality and performance. TVs just don’t break anymore and they are clearly a tremendous value for the price charged.  TVs have moved through a series of technical improvements in performance in a relatively short period of time. This could not have happened in the time it has if not for this new model of  manufacturing. New “TV” companies like Vizio are really not manufacturers of LCD TVs but rather design, marketing and sales experts. They lean on their Contract Manufacturing partners to finalize design and build a low priced, high quality TV for the masses. Their leverage in the marketplace creates demand for products that have created opportunities for contract manufacturers to grow and become very efficient at what they do.

This brings me to the main point I want to make.  Leadership and management for this new business model are dramatically different than before. Here are some criteria required to compete and thrive:

Innovation – If we assume that there is little differentiation in manufacturing and, thus, less value in the ability to innovate around putting the product together, value and differentiation becomes more about the impact the product has on the market and its ability to define new and redefine existing segments.

Matrix – Partner alignment is essential. The new model relies on partners for engineering,manufacturing, and defining new sales channels. Alignment beyond traditional metrics is required. As an example assuring the measure of success for the partner is directly aligned to the company’s is critical. As business improves for the manufacturer (revenue, margin, share, etc.) the partner’s success must follow. Compensation models should be aligned.

Accountability –As you might imagine partners must be accountable for what they are being paid to do. However what can happen is that when companies outsource a function sometimes the accountability for the results of what was outsourced tend to want to be moved to the outsourced partner. This won’t work. While the responsibility for what is outsourced moves to the partner the accountability for the results MUST remain with the manufacturer. Do you think Apple customers hold the China based contract manufacturer accountable for the fact that their Ipod screen has failed? Of course not. While the contract manufacturer irresponsible for the quality of the product they manufacture for Apple,ultimately Apple is accountable for the product quality and accountable to their customer.

Open architecture– Over time more and more proprietary technologies will vanish. This of course is not true for niche markets where technological or design differences define the space. For 95% of everything else proprietary technologies make little sense. Open the technology up for all to use and compete with. This doesn’t mean the technology can’t be licensed it just means that trying to hold on to a technological advantage for more than a short time will only come back and bite you. Create value in features that align your product to what the market really needs. Open architecture also allows Contract Manufacturers to get to manufacturing scale faster and manufacturer at lower cost and higher quality.In the future product differentiation will be defined more by features and service.

World-Class Service and Support – Differentiate through Service. Service matters so keep service close to your business as a core competency. While outsourcing might make sense in many areas of the business be careful about outsourcing service and support especially the areas that touch the customer. The experience your customers have with service and support will make a difference. Service and support is defined as well beyond when something breaks. It starts with the experience one gets when opening the box, loading SW, installation instructions, etc. right through the ease to add features, upgrade and dispose of the old product for a new one. Warranty repair as an example while a meaningful expense item for most products is a necessary evil and one that will not define the view of the service experience by the customer. If you consider that most consumer and business technology products break at a 1-2% annual rate most customers will not experience a repair event. They will establish the impressions in other areas. Pay attention to the entire client experience and design a service strategy that is without compromise.   As an example I own a Dell notebook. Under The covers I don’t believe it is much different than a comparable HP or Lenovo.I have a premiere service contract which entitles me to on-site next day service as well as easy to engage, high quality technical support. I have had a few problems with this notebook yet my experience with Dell and, thus, my perception of their service is first class. I recommend their products and it is the service I receive that makes the difference. Dell gets it. What’s keyhere is that how a company reacts to problems will define the perception of the quality and service of the company. Ironically companies can positively influence the perception of their product or service through a “service event”or a failure. If they do a great job in solving the customer’s problem they can benefit in perception compared to if no problem actually occurred.

World-Class Marketing – Marketing is another strategic difference for most companies. In this case marketing isn’t just the traditional campaigns,advertisements, and promotions. It is much more than that. It includes the market research, customer knowledge, and competitive analysis to define the direction of the company.  Again let’s use Apple as an example. Apple emotionally attaches their customers and potential customers to the brand. They create demand and then fulfill it instead of building products and then figuring out how to sell them.  They are defining the markets that create demand for their products.  Beyond the typical block and tackling of marketing are more contemporary disciplines that include working with enabling and complementary technologies. From a technology point of view think of it as identifying the applications that define the need that can only be filled by your product.  While my Sony MP3 player sounds better and is probably built better than an IPod the market share for Sony is less than 2%.Apple has created demand well beyond the product and aligned to the new manufacturing model to deliver a high quality cost-effective product to consumers.

Diverse and far reaching Sales channels – Lastly the traditional view of sales just doesn’t apply anymore. Alternative sales channels were originally put in place to assure the volumes of products that could be sold did. Today sales channels are evolving to allow more penetration into market segments that could not be got to in other ways. Additional Expertise in selling to specific segments of business requires a modern sales channel. Sales channels can provide not only reach but depth in penetration.  A well thought out sales channel strategy is required to compete. Emerging sales channels are“complimentors” to your products. They create demand (sales) indirectly and typically with little or no incremental cost. Think about how many Lexus cars are sold because JD Powers rates them number 1. No sales cost to Lexus.

All of this brings me to the opportunity at hand. What amazes me about the opportunity in front of us is that the skills required “IN COMPANY” are skills we have, in part, today and skills that, when leveraged, create working environments that are far more interesting to work in. The “intellectual capital” required while different than one of a more traditional manufacturing models is where the skills required are diverse and far more value oriented.

Manufacturing businesses will get measured more on the ability of the products sold hitting the mark in the marketplace than on unit cost of manufacturing, plant capacity, etc. It’s a knowledge-based business in which the expertise around final design and manufacturing is best left in the hands of the companies that solely do this and do it well.  Products hit the market competitively priced and many consumer products in particular will see greater price reductions in shorter periods of time redefining “value” for the consumer. This is the result of the new model and as contract manufacturers are now competing for business there is a new found level of “honesty” in pricing and quality.

Embrace the evolution of the manufacturing model and make your mark by creating a difference in aligning your products to current and future market needs. Use outsourced partners not as suppliers but as a strategic extension of your company. You can now manufacture anything you design competitively and at high quality.

Leadership in these emerging manufacturing companies will be challenged in new ways and what it took to leading the old environment just won’t work in the new one.  I can envision the new “Manufacturing Organization”.

Chief Executive Officer, Chief Marketing Officer, Chief Sales Officer, Chief Strategic Partner Manager, and Chief Visionary Officer.

Outsource the rest and you’re in business! Manufacturing company’s growth will now be limited by market impact,share, and new market segments captured and not by plant capacity and the number of sales reps on the street. Quite a different model and one that will create a lot more neat opportunities for people in the future.  Smart companies and smart countries will keep all of the very interesting high value work and benefit from the growth and profits associated with this new manufacturing model. Enjoy!

The reliance on external partners, the use of new sales channels, and the redefining of value along the lines of alignment to need instead of manufacturing efficiency will change the playing field. Understanding how to navigate and anticipate market needs is needed to make this business model change.

About Frank Picarello

Frank is a well-respected leader in providing technology services to small and medium-sized businesses. He is currently COO for TeamLogic IT, Chairperson for CompTIA's Small Business Owner's Group, and a member of CompTIA's Unified Communication Committee.

View all posts by Frank Picarello

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