Global Competition Nears The Tipping Point — How IT Systems Can Help

By James Gorham, Vice President, North American Sales Support and Install Base Sales

Ask any manufacturer what keeps them up at night and globalization is sure to come up.

Though the United States is the world's leading producer of manufactured goods — the manufacturing sector on its own is the 5th largest economy in the world, larger than China's entire economy — there is hardly a sense of domination and confidence.

As we all know, the recent recession hit the manufacturing sector hard. Output fell 6 percent and manufacturing employment dropped 2.6 million between late 2000 and 2003. Even more significantly, employment in manufacturing has fallen 8 percent since the recovery began.

Since the mid-nineties there has been both unprecedented economic expansion followed by unprecedented downturn, and this has generated voluminous attention. Yet take a step back and you see that these events have actually masked a much larger and much more powerful trend towards the globalization of manufacturing.

Major Trends in Globalization: A Small World After All
Three major trends have influenced globalization and competition from non-industrialized nations:

• Continual advances and rapid dispersion of technology
• Large-scale reduction of trade barriers around the world
• Political and economic changes brought about by the end of the Cold War

These forces have paved the way for new manufacturing juggernauts to emerge with a tremendous cost advantage over industrialized manufacturers. The trends are pivotal. International trade is truly massive and manufactured goods make up the bulk of it. In 2002, manufactured goods accounted for 60 percent of all trade worldwide, worth a staggering $4.8 trillion. With such a huge market in play, there is competition like never before.

One of the areas most intensely affected by globalization is price. According to the National Association of Manufacturers, the average price of manufactured goods has dropped one percent a year for the past three years; but this is merely an acceleration of a greater trend. Prices for manufactured goods in the United States over the last 25 years have increased 60 percent while prices in the overall economy increased 140 percent.

A recent survey by the National Electrical Manufacturers Association on manufacturing and sourcing in China highlighted the effect of low cost labor. Survey respondents reported that on average, to manufacture a product in China and ship it to its final destination cost 27 percent less than to produce it domestically. No fuzzy math there — we are feeling the squeeze.

Corporate managers, confronted with tepid demand and a virtual disappearance of pricing power, have struggled to maintain profit margins in recent years. With price increases largely off the table and demand soft, lowered costs have become the central target in the drive to increased profitability.

A New Global Business Model
Manufacturers need to understand the processes behind globalization in order to adjust to it. The reality is that globalization will continue on its relentless path because of economics and capitalism. Customers want more affordable products and companies that fail to provide them will go out of business.

The pressures to reduce costs have primarily forced manufacturers to reexamine their businesses in an attempt to eliminate costs wherever possible. Lowered costs are generally associated with increased output per hour. Information technology has dramatically improved manufacturing productivity by allowing companies to produce much more with the same or less resources. The massive investment companies made in information technology in the 1990s has been estimated to account for 60 percent of all productivity increases from 1995 to 2000, a time when productivity surged 80 percent over its historical performance since their early 1970s.

However, beyond the repetitive cost reductions is really the need for manufacturers to create a new global business model. Manufacturers have increasingly dispersed operations spanning the globe-from sourcing to production to distribution-and business is thus much more complex than ever before. Growing competition from around the world means manufacturers are becoming more demand-driven: they have to become more responsive to their customers and offer new services such as product configuration.

These operational and market factors introduce new challenges for manufacturers and require a revision in all aspects of operations: from how to sell and execute customer orders, how to source, how to produce, how to manage supply chains, and how to manage the entire business.

Around The World in 80 Milliseconds
On a foundational level, manufacturers of all sizes and structures need to examine their existing business processes and supporting IT systems and ensure that they reflect the new reality of globalization:

• Do you need to invest in new, enterprise-wide technologies? Do you have solutions for global supply chain planning (centralized planning) and localized production and fulfillment? Your business is now global — either with a global supply base or global customers — and your supporting IT systems need to be global as well. With intense competition, you need to get the most from your resources and be able to work smarter, not harder.
  
  
• Are your systems integrated-both internally and externally-so you can work more closely with your customers and suppliers? The nature of global manufacturing requires systems and data working in concert, in real-time, where you can see everything in order to make good decisions, please customers, and remain competitive with others who have already shortened the time between events and their response to them.
  
  
• When you cannot compete on price, which is inevitable in a global economy, do you have the ability to provide more sophisticated offerings such as configured products and services? Product customization adds margin and is a competitive advantage. Product configuration and customization require sophisticated technology and materials management techniques to be successful.
  
  
• Have you really cut all possible costs? Many organizations have yet to implement lean manufacturing techniques as well as quality assurance programs that guarantee zero defects in production. Those that have embraced time-honored process and product innovations, and leveraged their systems to support them, have reported the rewards.
  
  
• Are you a full service company? Globalization and better access to information is accelerating product commoditization. Customer service is now a recognized path to differentiation, higher satisfaction, and increased margins.
  
  

The World is Yours
Many small and medium-sized manufacturers have not kept up to date with new technology and new equipment, and one is hard pressed to fault them. These enterprises face falling sales, decimated margins, and often lack the wherewithal for major implementations.

However, with global competition reaching a tipping point, information technology is no longer a choice for manufacturers — it is a competitive mandate.

Technology has already been eroding the competitive advantage that manufacturers in industrialized countries have enjoyed for so long. Technological advancements, spurred by foreign direct investment, are now quickly dispersed to emerging markets in the form of state-of-the-art facilities that produce high-quality, low-cost goods. Manufacturers already face and will increasingly face stiff global competition not only from producers of low-cost commodity items but also from producers of sophisticated products and the tools that make them.

The days of regional products and manufacturing are over. Regardless of company size, the competitive landscape for all enterprises is based on a global map. To compete on a global basis means responding to continuous customer demand overseas, global sourcing, joint ventures and developing a global presence through acquisitions.

As a result, manufacturers must adopt more and more applications that provide cross-divisional or corporate-wide leverage to maximize global corporate resources, buying power, and intelligence.